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Ireland’s Sovereign Debt Crisis

Ireland’s Sovereign Debt Crisis
Karl Whelan, University College Dublin
May 2011
Ireland’s Sovereign Debt Crisis
Karl Whelan
University College Dublin1
May 2011
1 This paper was presented at a workshop on "Life in the Eurozone With or Without Sovereign Default?"
that took place at the European University Institute in Florence on April 14, 2011.
1. Introduction
Among the countries currently experiencing sovereign debt crises, Ireland’s case is
perhaps the most dramatic. As recently as 2007, Ireland was seen by many as top of the
European class in its economic achievements. Ireland had combined a long period of
high economic growth and low unemployment with budget surpluses. The country
appeared to be well placed to cope with any economic slowdown as it had a gross debt-
GDP ratio in 2007 of 25% and a sovereign wealth fund worth about €5000 a head.
Fast forward four years and Ireland is shut out of sovereign debt markets and in an EU-
IMF adjustment programme. Its debt-GDP ratio has soared over 100% and the sovereign
wealth fund is effectively gone. In this short paper, I provide a brief review of how this
rapid change came about and discuss potential future developments in relation to
Ireland’s sovereign debt situation.
2. The Rise and Fall of the Celtic Tiger
It is now well known that Ireland’s famed “Celtic Tiger” ended with the collapse of a
housing bubble and a banking crisis. Many have thus been tempted to describe the Irish
boom as largely built on an unstable credit splurge. However, this would underestimate
the true progress made by the Irish economy during the two decades prior to 2007.
The Birth of the Tiger
Before the “Celtic Tiger” became a well-known phrase during the 1990s, the Irish
government had implemented a wide range of policies that helped to produce large
increases in labour productivity. The 1960s saw a move away from protectionist trade
policies and set Ireland on the path to EU membership in 1973. Industrial policies
focused successfully on encouraging export-oriented foreign direct investment. There
was also a gradual improvement in educational standards as policies to provide
universal secondary education in the 1960s were subsequently followed by a large
expansion of the third-level sector. As a result of these policies, Irish productivity
growth consistently outpaced other advanced economies from the early 1970s onwards
and by the middle of the last decade, Irish labour productivity was very close to US
levels (see Figure 1).2
While Ireland’s pre-Tiger supply-side policies may have been good ones, its
macroeconomic stabilisation policies were not so good. Ireland reacted to the global
slowdown of the 1970s by running very large fiscal deficits, which cumulated in a debt
crisis in the 1980s. At the same time, the traditional currency link with sterling was
dropped for membership of the European Monetary System, which provided an
unstable monetary regime featuring regular devaluations.
By the mid-1980s, Ireland had a debt-GDP ratio over 110 percent and was paying out
almost 10 percent of GDP per year in interest payments. Tax rates had been raised to
punitive levels in a series of failed attempts to stabilise the deficit and growth had
It was at the depths of this previous crisis that the birth of the Celtic Tiger took place.
The period from 1987 onwards saw fiscal problems dealt with via a programme that
focused on restraining spending and by 1989, Ireland’s debt dynamics had clearly
moved in direction of sustainability. At the same time, the EMS finally also delivered a
period of monetary stability. With macroeconomic stability restored and good
fundamental policies in place, the Irish economy began to grow at an impressive rate.
Indeed, Ireland in the late 1980s was primed for growth. While its workers were
becoming increasingly productive, Ireland was significantly under-employed by
international standards. As Figure 2 shows, only about 30 percent of the population was
at work in the late 1980s. This underemployment partly reflected an exceptionally high
2 These data come from the US Bureau of Labor Statistics International Comparisons website.
unemployment rate (Figure 3). However, it also reflected demographic and social
Ireland’s baby boom occurred in the 1970s and peaked in 1980, so the depressed
Ireland of the 1980s was supporting a very large population below working age. This
demographic pattern gradually unwound over time so that by the late 1990s, Ireland
had a higher fraction of the working age population than either the US or the UK (see
Figure 4). Ireland in the late 1980s also had a very low rate of labour force participation:
While female labour force participation had increased steadily in other countries
throughout the 1960s and 1970s, this pattern was not replicated in Ireland (see Figure
5). However, when the economy recovered, there was a large female labour supply
ready to enter the workforce.
The combination of these factors meant that the Irish economy became an incredible
employment creating machine. Employment rose steadily from 1.1 million in the late
1980s to 2.1 million in 2007. Combined with steady improvements in productivity, the
Irish economy delivered a period of extraordinary growth: From 1987 to 2007, economic
growth averaged 6.3 percent per year.
This exceptional economic growth allowed Irish governments to achieve a holy grail that
was the envy of politicians around the world: They lowered tax rates and raised
spending year in and year out and yet economic growth delivered sufficient tax
revenues to generate a string of budget surpluses. By 2007, Ireland’s low stock of debt
appeared to position the country well for coping with a slowdown.
The Housing Boom
Unfortunately, Ireland’s position in 2007 was not nearly as strong as it appeared to
many outsiders or to the government of the time. Despite high levels of labour
3 See Honohan, Patrick and Brendan Walsh (2002). “Catching up with the Leaders: The Irish
Hare,” Brookings Papers on Economic Activity part 1, pages 1-57.
productivity, the later years of the Irish boom saw the build-up of dangerous
imbalances. At the heart of these imbalances was an extraordinary housing boom.
At the turn of the millennium, Ireland still had a relatively small housing stock, the
smallest stock per capita in the European Union.4
The response to this increase in housing demand was an extraordinary construction
boom. The total stock of dwellings—which had stood at 1.2 million homes in 1991 and
had gradually increased to 1.4 million homes in 2000exploded to 1.9 million homes in
2008. House completions went from 19,000 in 1990 to 50,000 in 2000 to a whopping
93,000 in 2006. Figure 7 puts this in context by comparing house completions per capita
with their equivalent in the United States. It shows that while Ireland’s rate of housing
completions during the 1970s and 1980s, had been comparable to that seen in the US,
housing activity gradually increased in Irelandparticularly after 2002to the point
where per capita completions were four times as high in Ireland as in the US.
With population growing, incomes
expanding rapidly and EMU providing access to mortgage finance at historically low
rates, there was a surge in the demand and ability to pay for housing. As a result, house
prices in Ireland quadrupled in price between 1996 and 2007, a pace of increase double
that seen in the United States over the same period (see Figure 7).
Construction became a dominant factor in the Irish economy. With the economy already
at full employment, much of the labour employed in the construction boom came from
the new EU member states in Eastern Europe, and this inward migration further fuelled
the demand for housing. By 2007, construction accounted for 13.3 percent of all
employment, the highest share in the OECD. Indeed, with the exception of Spain and
Portugal, Ireland’s share of construction employment exceeded all other OECD member
states by almost five percentage points.
The Irish government of recent years placed much of the blame for the economic
collapse on the international financial crisis. However, the evidence suggests that
4 See Somerville (2007).
Ireland was heading for a rough landing even in the absence of an international
recession. Measured against various “fundamental” factors, Irish house prices became
more and more over-valued and, by early 2007well before the first outbreaks of the
international crisisIrish house prices began to fall.5
As house prices fell, the demand for new houses began to collapse with the attitude of
potential buyers swiftly changing from being desperate to “get on the property ladder”
to deciding to wait to get a better price later. In mid-2008, the new Minister for Finance,
Brian Lenihan noted that the housing market had “come to a shuddering halt”. Figure 7
illustrates the scale of the collapse in housing construction, while Figure 8 shows how
the subsequent decline in construction employment directly accounted for about two-
thirds of the jump in the Irish unemployment rate after 2007. House prices have now
fallen about 40 percent from their peak values and continue to fall.
3. The Sovereign Debt Crisis
With the Irish economy having placed so many of its eggs in the construction basket,
one might have expected the authorities to have been careful to prepare for what was
going to be an inevitable slowdown. This, however, was not the case. While a very low
debt-GDP ratio due to years of fast economic growth may have appeared to provide a
significant cushion against any downturn, Ireland’s fiscal situation turned out to be
heavily dependent on the health of its property sector.
A Huge Deficit Opens Up
The collapse in construction activity, and the corresponding jump in unemployment,
resulted in a large loss in income tax revenues and an increase in social welfare
payments but if the fiscal consequences of the housing crash had been limited to these
5 There was relatively little discussion in Ireland at the time of the idea that house prices were
unsustainable even though it didn’t require sophisticated analysis to suggest that house prices were over-
valued. Notably, when Irish academic economists such as Alan Ahearne or Morgan Kelly questioned the
sustainability of house prices, they received a very negative reaction from the Irish government.
impacts, Ireland would have been positioned to cope well. However, Ireland’s tax base
had been altered during the later periods of the boom to collect more and more tax
revenue from construction activity.
Figure 9 shows the share of total tax revenue due to income taxes (the black line on the
left scale) and due to asset-based taxes such as stamp duties, capital gains tax and
capital acquisition tax.6
By late 2008, the collapse in construction activity was apparent and the world economy
was entering a severe recession. Irish real GDP declined by 3.5 percent in 2008 and by
7.6 percent in 2009. Despite having had years of budget surpluses, Ireland was suddenly
facing a yawning fiscal gap. Indeed, it was apparent by early 2009 that, without fiscal
adjustments, Ireland was heading for deficits of as large as 20 percent of GDP.
Thanks to booming housing activity and surging house prices,
the share of tax revenue due to these asset-based taxes rose steadily during the 1990s
and then rapidly during the period after 2002. At the same time, there was a
corresponding reduction of a similar magnitude in the amount of revenue collected
from income taxation. When construction activity collapsed, this substantial source of
government revenue disappeared almost overnight.
The scale of these potential deficits meant that, despite the low starting level of debt,
the Irish government realised there was no room for discretionary fiscal stimulus to ease
the effects of the severe downturn. Instead, from late 2008 onwards, the Irish
government has implemented a sequence of contractionary budgets featuring a
cumulative total of tax increases and spending cuts worth €20.8 billion. These
adjustments are the equivalent of 13 percent of 2010’s level of GDP or €4,600 per
person and represent the largest budgetary adjustments seen anywhere in the
advanced economic world in modern times.7
6 Ireland does not have a standard property tax. Instead, the government levied a stamp duty tax that was
paid in full when a house was purchased. With high levels of housing activity, this collected a lot of
revenue during the boom and almost nothing in recent years.
Despite these enormous adjustments, the
7 The IMF’s October 2010 World Economic Outlook examined historical episodes of fiscal consolidation in
fifteen advanced economies over 1980-2009. As a percentage of GDP, Ireland’s 2009 consolidation was
decline in the size of the Irish economy has been so severe—nominal GDP has declined
by almost 20 percentthat the European Commission are still projecting a budget
deficit of 10.6% in 2011.
The Banking Crisis
The tale of the Irish fiscal crisis is gruesome enough if one focuses alone on the collapse
of the construction sector and its effects on revenues and expenditures. However, the
straw that broke the Irish camel’s back was the effect on the state finances of the
government’s attempts to deal with a banking crisis.
The acceleration in housing activity after 2002 that is evident in Figure 7 was largely
financed by the Irish banks. These banks significantly changed their business model
during the later years of the boom. Prior to 2003, the Irish banks had operated in a
traditional manner, with loans being roughly equal to deposits. After 2003, these banks
increased their property lending at rapid rates and financed much of this expansion with
bonds issued to international investors.
From less than €15 billion in 2003, international bond borrowings of the six main Irish
banks rose to almost €100 billion (well over half of GDP) by 2007. In addition to rapidly
expanding their mortgage lending, the Irish banks also built up huge exposures to
property developers, many of whom had made fortunes during the boom and were
“doubling down” on property with ever more extravagant investments. Many of these
development loans were used for investments that could only have paid off if property
prices continued to rise. Leading the way was the now-notorious Anglo Irish Bank, which
specialised in property development. Anglo expanded its loan book at over 20 percent
per year and is now known to have had a series of serious corporate governance
the biggest the IMF researchers could find. The subsequent adjustments for 2010 and 2011 were of
similar size.
During 2008, as evidence built up of the scale of the Irish construction collapse,
international investors became concerned about the exposure to property investment
loans of the Irish banks. These banks found it increasingly difficult to raise funds on
bond markets and by late September 2008, two weeks after the collapse of Lehman
Brothers, the Irish bankers turned up at government buildings looking for help.
The Irish government’s decision on September 30, 2008 to give a near-blanket
guarantee for a period of two years to the Irish banks has been, and will continue to be,
hotly debated. The government appears to have taken seriously the assurances of the
Irish Central Bank that the banks were fundamentally sound and were merely suffering
from a short-term liquidity problem. Thus, the government appears to have believed
that the guarantee would not have consequences for the state finances. However, there
is also evidence that senior civil servants, as well as Merrill Lynch (who had been
recruited as advisors in the weeks prior to the decision) warned against the dangers of a
blanket guarantee.
By Spring of 2009, it became apparent that the losses at the Irish banks were extremely
large, most notably at the dreaded Anglo Irish Bank. This paper will not focus on the
various strategies the Irish government adopted from that point onwards to deal with
the crisis. However, the fact that the liabilities of the banks were guaranteed by the
government played a key role in limiting options to restructure insolvent banks in a way
that would have seen losses shared with private creditors. Thus, in 2009, the
government began using state funds to recapitalise the guaranteed banks.
The Endgame
By 2010, it was clear to international financial markets that in addition to a serious
problem with its budget deficit, Ireland was facing a large bill of uncertain size in
relation to fixing its banking sector. A National Asset Management Agency (NAMA) was
set up to issue government bonds to the banks to purchase distressed property assets at
a discount and as 2010 went on and NAMA acquired more properties, it became clear
that the final bill for recapitalising the Irish banks would be enormous.
In September 2010, the government provided a “final estimate” that Anglo Irish Bank
would cost the state about €30 billion or almost €7000 per person living in Ireland
today. The cost of these losses is being covered by a “promissory note” which will make
cash payments over a number of years but which was fully counted against Ireland’s
general government deficit in 2010, leading to what must be a world record official
deficit of 32 percent of GDP.
As the economy failed to show evidence of a strong recovery, international markets also
became increasingly concerned with the future losses of the Irish banks due to
mortgages and business loans. The banks had been able to issue bonds from late 2008
to early 2010 under the protection of the state guarantee. However, as concern about
potential sovereign default began to rise, this guarantee ceased to be of much use.
Many of the bonds that had been issued matured in September 2010, when the original
guarantee ran out.
When the banks failed to find new sources of market funding to roll maturing bonds or
replace the corporate deposits that also began to leave the system at this point, they
turned to the ECB for emergency funding. Borrowing from the ECB by the guaranteed
banks, which had been negligible prior to the crisis, jumped from €36 billion in April
2010 to €50 billion in August to €74 billion in September. The banks also began to run
out of eligible collateral to use to obtain loans from the ECB, at which point the ECB
allowed the Central Bank of Ireland to begin making “emergency liquidity assistance”
loans to the Irish banks
International markets, which had been reasonably confident throughout 2009 that
Ireland would make it through without a sovereign default and which generally had a
favourable view of the Irish government’s fiscal adjustment programme, became
increasingly concerned that the Irish banking sector was going to destroy the
creditworthiness of the Irish sovereign. Bond yields on sovereign debt rose in
September and October and then moved up dramatically in November following the
famous Deauville declaration of Mrs. Merkel and Mr. Sarkozy.
4. The EU-IMF Bailout and Future Prospects
By mid-November, the game was up for the Irish government. Failing to see any sign of
improvements in the banking situation, the ECB appears to have made its continued
support for the Irish banking system contingent on Ireland applying the EU and the IMF
for a multi-year lending programme.
The EU-IMF Deal
In late November, the Irish government agreed a multi-year funding deal with the EU
and the IMF. The programme contained commitments to implement a further €15
billion in fiscal adjustments over the period 2011-2014, including a €6 billion adjustment
for 2011 that was implemented in the budget passed in December 2010. Figure 11
shows the path for the Irish budget deficit that is projected by the European
Commission. The deficit is projected to remain high over the next few years but to
gradually move towards 3 percent of GDP in 2015.
The EU-IMF programme also contains a set of measures to stabilise the banking sector.
Rather than stabilise the banking situation, the announcement of the EU-IMF deal
appears to have intensified the problem for a while, as deposits continued to flee the
Irish banking system and reliance on central bank funding increased even further. The
programme included a commitment to conduct a further round of “stress tests” on the
Irish banking system. These tests were released at the end of March and were
accompanied by a commitment from the Irish government to provide a further €24
billion in funding to recapitalise the continuing Irish banks to high levels.8
8 Anglo and the smaller but equally profligate Irish Nationwide Building Society are being wound down.
It remains to
be seen whether these announcements will stabilise the funding situation for these
With the latest announcements, the Irish government has now provided (or is about to
provide) recapitalisation funds of about €70 billion (about 45 percent of the 2010 level
of GDP) to offset the losses made by the Irish banks. Some of this money may eventually
provide a return if the state’s shares in banks such as Allied Irish or Bank of Ireland are
sold to private ownership at some point in the future but the vast majority of these
funds are simply gone.
Debt Sustainability
The official EU-IMF line is that Ireland will return to borrowing in the sovereign debt
markets in late 2012 and will be able to do so at rates that allow the debt to be
sustained. This will be re-enforced by a slow but steady return to economic growth that
will see the economy growing by 3 percent per year in real terms by 2014.
The black line in Figure 12 shows the debt-GDP ratio that would be associated with this
relatively rosy scenario. The debt-GDP ratio, which had been as low as 25 percent in
2007 but is estimated to be 112 percent in 2011 is now projected to peak at 120 percent
in 2013 and only slowly decline thereafter. Interest as a share of GDP, which had
started the crisis at only one percent, is projected to stabilise at about 6 percent in GDP,
while the primary deficit is projected to move from 8.6 percent in 2010 to a primary
surplus of 3 percent in 2015 (see Figure 13).
There are some arguments in favour of such a scenario occurring. Despite very high
yields on secondary market debt, the coupon rates on Ireland’s existing private debt are
very low. The average interest rate that Ireland paid on its debt in 2010 was about four
and a half percent. The average interest rate on EU-IMF package of 45 percent of GDP is
higher than that on existing debt but it also has a relatively long maturity of seven and
half years, so Ireland will not be under huge pressure over the next few years to replace
this funding with private borrowing. Thus, official projections are based on the idea that
the average interest rate that the Irish government will pay on its debt will stabilise at
about 5.4 percent in 2014 (see Figure 14) which provides room for a small primary
surplus to start reducing the debt ratio.
There are also some compelling arguments against the official scenario. The assumed
return to steady 3 percent growth may be too optimistic. Ireland cannot rely on a return
of many of its previous sources of growth such as productivity catch up, demographic
patterns and growth in participation.
Fiscal adjustment and debt overhang problems will continue to depress domestic
demand. And while the Irish government regularly points to the role improving
competitiveness should play in boosting exports in the coming years, the plan appears
premised on a smooth recession-free ride for the world economy in the coming decade.
It also assumes that the government will not be providing further funds to recapitalise
the Irish banking sector, which owes vast quantities to emergency lending to the ECB
and Irish Central Bank. Taken together, the official analysis paints a fairly rosy scenario
which may not come to pass.
Another factor worth noting is that Ireland’s debt burden looks even higher when
measured relative to GNP as opposed to GDP. For most countries, there is very little
distinction between these two measures. However, a large (indeed, increasingly large)
fraction of Irish output is due to profits that are repatriated by multinationals. The
relatively low corporate tax rate of 12.5 percent that is charged on these profits has
been a repeated source of controversy but it is unlikely that the Irish government is
going to introduce large changes to this rate as it is seen as central to industrial policy.
For this reason, most of the tax burden falls on the domestic incomes measured by GNP
and as the blue line in Figure 12 illustrates, this measure of the debt-burden is set to top
As of now, financial markets appear to be placing more emphasis on the negative
factors than on the positive factors stressed by the EU and the IMF. Yields on Irish
government debt are above 10 percent and this pricing appears to be based upon the
assumption that there will be a debt restructuring. Against this background, the official
plan’s assumption that private sovereign borrowing will recommence in late 2012 seems
optimistic. There may be some secondary market activity in Irish debt at the current
high yields but it’s questionable whether Ireland can sell the large amounts of debt that
would be required to finance itself once the EU and IMF funds run out.
An ESM Solvency Test?
Based on the European Commission’s projections, Ireland is likely to run out of money in
early to mid-2013 if it cannot access funds in the private sovereign bond market. At
present, my guess is that Ireland will not be able to sufficiently return to the sovereign
bond market to avoid having to request funds from the new European Stability
According to the ESM “term sheet” released in March, a request for funds from the ESM
will require a “sustainability analysis” to assess whether “a macro-economic adjustment
programme can realistically restore the public debt to a sustainable.”9
It is not clear how such a sustainability analysis will work but if the Irish government
manages to stick to its current adjustment programme and the macroeconomic
assumptions underlying this programme come to pass, it seems likely that an ESM
analysis will produce similar projections to those currently published by the EU and IMF
showing a stabilisation and reduction in the debt-GDP ratio. Most likely, under such a
scenario, the debt will be deemed sustainable. If, however, Ireland falls short of the
If the debt
burden is deemed unsustainable, then “the beneficiary Member State will be required
to engage in active negotiations in good faith with its creditors to secure their direct
involvement in restoring debt sustainability.”
9 See
targets set in the current adjustment programme and the debt outlook looks worse in
2013, then this will raise the question of whether private sector debt should be
A Uruguay style “light dusting” restructuring (to borrow the phrase used by Buchheit
and Gulati, 2011) in which maturities are extended while coupon payments are
maintained at existing levels, may prove attractive for the EU and IMF because a second
deal for Ireland would see the balance of risk on Irish sovereign debt shifting over from
private bondholders to the official sector. Moreover, with both the IMF and soon the
ESM claiming a creditor status that is senior over private bondholders, such a deal could
be a tipping point that rules out private purchases of Irish government bonds for a
number of years. A light dusting approach would lock in a large volume of privately
supplied funds that could share the burden that could be associated with any later more
severe restructuring of Irish sovereign debt.
Which route is chosen, and how any potential restructuring is organised, are likely to
depend on events elsewhere. Greece appears to be closer to point of sovereign debt
default than Ireland and the consequences of any attempts to restructure Greek debt
would have a significant impact on the attitude of the European authorities to applying
a similar approach to Ireland.
Buchheit, Lee and G. Mitu Gulai (2011). Greek Debt The Endgame Scenarios, working
paper, Duke University.
Honohan, Patrick and Brendan Walsh (2002). “Catching up with the Leaders: The Irish
Hare,” Brookings Papers on Economic Activity, Part 1, pages 1-57.
International Monetary Fund (2010). World Economic Outlook, Chapter 3: “Will it Hurt?
Macroeconomic Effects of Fiscal Consolidation”.
Somerville, R.A. (2007). “Housing Tenure in Ireland,” The Economic and Social Review,
pages, Volume 37, 107-134.
Whelan, Karl (2010). "Policy Lessons from Ireland’s Latest Depression," The Economic
and Social Review, Volume 41, pages 225-254.
Figure 1: US and Irish Labour Productivity (PPP-Adjusted, Source: US BLS)
Figure 2: Employment-Population Ratios of Ireland, UK and US
Figure 3: Unemployment Rates
Figure 4: Fraction of the Population Aged between 15 and 65.
Figure 5: Labour Force Participation Rates
Figure 6: House Prices in Ireland and the US
Figure 7: Housing Completions Per Thousand People
Figure 8: Fraction of Labour Force in Construction and in Unemployment
Figure 9: Composition of Tax Revenues
Figure 10: Loans and Deposits at the Guaranteed Irish Banks
Figure 11: Budget Deficit as a Percent of GDP
Figure 12: Debt-GDP and Debt-GNP
Figure 13: Composition of Non-Bank Deficit (EC Projections)
Figure 14: Average Interest Rate on Irish Government Debt
... But growth was heavily dependent on debt-driven property and housing markets. With the population growing, incomes expanding rapidly, and the European monetary union providing access to mortgage finance at historically low rates, there was a surge in the demand and ability to pay for housing (Whelan, 2011). The expansion of borrowing, particularly for property, was encouraged by the following: changes in the Irish economy; weak risk-management protocols and practices in the main lending banks; lower credit standards for mortgage lending; lax bank supervision; and the ability of the Irish financial intermediaries to borrow heavily in international financial markets. ...
... Rising demand did not result in any significant inflationary pressure on consumer goods, though rapid asset price inflation did occur. But, with rapidly rising consumption fuelling imports, the current account balance moved into deficit to reach around 5.4 percent of the GDP in 2007 (Whelan, 2011). ...
... After years of budget surpluses, Ireland was suddenly faced with a yawning fiscal gap. By 2010, it was clear to international financial markets that in addition to a serious problem with its budget deficit, Ireland was facing a large bill of uncertain size in relation to recapitalising its banking sector (Whelan, 2011 andWhelan, 2013). ...
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... 48, NO. 4, AUGUST 2014 a systemic threat to Ireland's banking sector and wider economy, and believing that there was no underlying solvency issue at the Irish banks, on the night of 29 September 2008, the Irish government issued a blanket guarantee on the liabilities of Ireland's six domestic banks. In the period following the guarantee, a series of official estimates of the losses incurred by Irish banks were released, with each release constituting an upward revision on the previous figure, as the scale of these losses emerged (Whelan 2011). ...
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... Much of Europe suffered from a 'mutually reinforcing interaction between limited productivity gains, protracted deleveraging, weak banking sectors and distorted relative prices' (Darvas et al., 2013, p.7). The commingling of financial crisis with sovereign debt crisis in Ireland, in the context of an all but stagnant European economy, appeared to point toward real problems of debt sustainability (Whelan, 2011). It is surely a matter of some concern that Irish citizens' trust in their own government, always more continent than the EU average, fell precipitously after the crisis began. ...
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Ireland has been taken to be an exemplary case of successful growth-promoting fiscal retrenchment, not once but twice – first, in the fiscal consolidation undertaken in the late 1980s, which was taken as one of the classic original instances of ‘expansionary fiscal contraction’, and again now, in the context of meeting the fiscal deficit targets set by the current EC-ECB-IMF loan conditions. This paper argues that many of the apparent lessons drawn from Ireland’s experience turn out to be more complex and even misplaced upon closer inspection. Ireland was never an instance of ‘expansionary fiscal contraction’ in the sense in which it now understood, in the late 1980s; and the conditions that facilitated the restoration of growth at that time are no longer possible now.Firstly, the paper shows that standard methodologies for identifying the object of interest in fiscal consolidation misses out on what is really central, which is the ongoing politics of ‘fiscal effort’. Secondly, this approach challenges conventional ideas about the primacy of spending cuts over tax increases. Thirdly, Ireland’s fiscal stabilization in the earlier period depended on devaluation, international growth, and strong social pacts. None of these conditions is present in the ‘internal devaluation’ under way since 2008. Ireland has committed to fulfilling the terms of the EU-ECB-IMF loan programme, but there are few grounds for anticipating that this will of itself result in the resumption of growth. Fiscal adjustment efforts are much more painful without the growth-promoting contextual conditions that were present in the earlier period.
Ireland’s profile traditionally saw high rates of home ownership, a mix of public and private pensions, annuity style mortgages, a favourable pensioner support ratio and a modest replacement income on retirement. As the country emerged from the financial crisis, housing supply has lagged behind demand, with many individuals and households moving into a heated rental residential property sector. Meanwhile pension coverage has declined. Now, policymakers are examining the multidimensional parameters of ageing to prepare for future dependency patterns and projected greater outlays to secure acceptable retirement income levels. This chapter explores the trends and structural context in this domain, thereby providing a map on which policy options can be plotted, all in pursuit of a consensual and sustainable pathway.
Critical junctures are an enduring concept in the study of institutional change, but the literature prompts a certain amount of definitional ambiguity around what a critical juncture is, and how best we should approach describing and explaining these rare instances of change. This paper presents and utilises a revised critical juncture framework, which helps to explore the role of context, openings, institutions, ideas, agents and discourse in these significant change events. The framework is then utilised in relation to the Irish Department of Finance (DoF), which is a pivotal institution at the heart of the Irish system of government. It is argued that the DoF’s position and influence in government have been impacted by three institutional change events, involving the establishment of the Department of the Public Service (DPS) in 1973; its disbandment in 1987; and the establishment of the Department of Public Expenditure and Reform (DPER) in 2011. The available evidence supports a linkage between DPS’ establishment and DPER’s establishment almost 40 years later.
What is often abbreviated to GFC included three distinct crises: the 2007-8 North Atlantic financial crisis, a 2008-9 global economic crisis and public finance crises which became increasingly focussed on the eurozone in 2010-12. The relative weight of emerging market economies in the global economy, which had been increasing for several decades, grew even more rapidly in 2008-11 as the economies of the USA and Europe faltered, and other open economies recovered rapidly from the global economic crisis. This poses challenges for global economic governance, although there are constraints on Asia being a more assertive force. For the EU the greater dangers are, first, that if EU leaders see their economies as victims of a GFC then they will fail to address their economies’ own shortcomings, and, second, that preoccupation with internal crises will distract EU leaders from rising to the challenges and opportunities associated with the evolving multipolar global economy.
This paper outlines a simple routine to calculate the marginal effects of logit and probit regressions using the popular statistical software package R. I compare results obtained using this procedure with those produced using Stata. An extension of this routine to the generalized linear mixed effects regression is also presented.
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This paper estimates the marginal effect of class size on educational attainment of high school students. We control for the potential endogeneity of class size in two ways using a conventional instrumental variable approach, based on changes in cohort size, and an alternative method where identification is based on restriction on higher moments. The data is drawn from the Program for International Student Assessment (PISA) collected in 2003 for the United States and the United Kingdom. Using either method or the two in conjunction leads to the conclusion that increases in class size lead to improvements in student’s mathematics scores. Only the results for the United Kingdom are statistically significant.
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This paper uses a cross-country representative sample of Europeans over the age of 50 to analyse whether individuals’ height is associated with higher or lower levels of well-being. Two outcomes are used: a measure of depression symptoms reported by individuals and a categorical measure of life satisfaction. It is shown that there is a concave relationship between height and symptoms of depression. These results are sensitive to the inclusion of several sets of controls reflecting demographics, human capital and health status. While parsimonious models suggest that height is protective against depression, the addition of controls, particularly related to health, suggests the reverse effect: tall people are predicted to have slightly more symptoms of depression. Height has no significant association with life satisfaction in models with controls for health and human capital.
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Since firm heterogeneity has been introduced into international trade models, the importance of firm entry and exit (the extensive margin) has been highlighted. In fact, Chaney (2008) illustrates how accounting for this extensive margin and heterogenous firms alters the standard gravity equation; thereby reversing the previously predicted effect the elasticity of substitution has on the elasticity of trade flows. Furthermore, Cole (forthcoming) points out that ad valorem tariffs affect the extensive margin quite differently than the commonly used iceberg transport cost. In this paper, I show that the elasticity of trade flows with respect to tariffs is more elastic than that of iceberg transport costs. Thus, elasticity estimates derived from variables such as distance may underestimate the effect caused by a change in tariffs.
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This paper looks at a reverse side of the pollution haven argument by answering a question on whether environmental regulations of the destination, rather than source countries play a role. The study utilises a firm-level dataset with aggregate export destinations of Europe and rest of the world (ROW) to establish whether a firm adjusts its energy use in response to a decision to start exporting to a more (Europe) or a less (ROW) regulated destination. Although on average, no energy adjustments are found for these destinations, focusing on the most polluting industries or the most energy-intensive firms reveals that firms' decision to start exporting to Europe brings about significant energy improvements, unlike a decision to start exporting to the ROW. Further estimations suggest that no adjustments found for firms exporting to the ROW are consistent with exporting to non-OECD region.
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This paper describes Ireland last major bank failure before the collapse of Anglo-Irish Bank in 2008. It points to resonances between that earlier failure and the events that led to the downfall of Ireland's banking system in 2008-2010.
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The past few months have exposed serious problems in relation to Europe’s ability to cope with financial stress. Placing the new Financial Stability funds on a permanent basis, in the form of a new European Monetary Fund will be required if Europe is to deal effectively with the serious debt problems of some Eurozone countries. However, this fund should exist to manage sovereign defaults in an orderly manner, not to prevent them altogether. Bank supervisors also need to publish regular stress tests, change their regulations on the risk weighting of sovereign debt and put new resolution procedures in place. Together, these reforms will allow Europe to deal with future sovereign debt problems without provoking a crisis.
This paper addresses the question of whether higher levels of education contribute to greater tolerance of homosexuals. Using survey data for Ireland and exploiting a major reform to education, the abolition of fees for secondary schools in 1968, it is shown that increases in education causes individuals to be significantly more tolerant of homosexuals. Ignoring the endogeneity of education leads to much lower estimates of the effect of education. Replicating the model with data for the United Kingdom generates very similar results.
Using the nationally representative Slan dataset we calculate concentration indices for the incidence of obesity for men and women. We finder higher concentration indices for women than for men, but we also find that concentration indices fell between 2002 and 2007. However this appears to be owing to an increased incidence of obesity amongst better off people rather than decreased obesity amongst the less well-off. A decomposition of the concentration indices suggest that the greatest contribution to the gradient comes from the combination of lower rates of obesity amongst those with 3rd level education and their higher income.
In a competitive model we ease the assumption that efficiency units of labour are the product of hours and workers. We show that a minimum wage may either increase or decrease hours per worker and the change will have the opposite sign to the slope of the equilibrium hours hourly wage locus. Similarly, total hours worked may rise or fall. We illustrate the results throughout with a Cobb-Douglas example.