Financial Crisis in Ireland: Causes, Culprits and Cures Lars Frisell, Chief Economist

CPA Annual Business Lecture, 30 August 2012

Loans for house purchase - %

Change Year-on-Year

2

-5

0

5

10

15

20

25

30

35

40

Au

g/9

1

Sep

/92

Oct

/93

No

v/9

4

Dec

/95

Jan

/97

Feb

/98

Mar

/99

Ap

r/0

0

May

/01

Jun

/02

Jul/

03

Au

g/0

4

Sep

/05

Oct

/06

No

v/0

7

Dec

/08

Jan

/10

Feb

/11

* Excludes IFSC. Property-related lending refers to the construction, real estate activities, and residential mortgages sectors. Source: Central Bank of Ireland, Statistics

Property-related lending - domestic Irish

banks property related lending/total

private loans *

626464

6767

6359

56

5248

45

0

10

20

30

40

50

60

70

2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 2010

%

Investment in dwellings

3

0

2

4

6

8

10

12

14

16

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

% of GDP

IE

EA-17

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Annual production of housing units

Property related tax revenues

4

Banks’ Corporate Culture - Institutional memory - Guidelines - Incentives

Banks’ Corporate Governance - Risk control - Management - Board -

Trusted third parties - Accountants - Rating agencies - Analysts

Authorities and politicians - Tools - Resources - Mandate

Influence on business model

Culprits

Strong world-wide growth up to 2007...

Real GDP growth

Source: AMECO database European Commission .

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

USA UK JPN

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FR DE GR

...yet persistently poor fiscal positions

General Government Deficit (% GDP)

Source: AMECO database European Commission .

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

USA UK JPN

-16

-14

-12

-10

-8

-6

-4

-2

0

2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

FR DE GR

An indebted union

Government debt, per cent of GDP

Source: Eurostat

0 20 40 60 80 100 120 140

EMU

Netherlands

France

Italy

Spain

Germany

Cures

• National budget consolidation

• Restoring competitiveness

• Bank restructuring

----------------------------------------------

• Actions by ECB/EFSF/ESM (?)

-----------------------------------------------

• Strengthened fiscal framework

• Reform of bank regulations

• Reform of bank supervision and resolution

On-going domestic measures

Near-term European measures

Long-term reforms

Debt composition

10

40%

50%

60%

70%

80%

90%

100%

110%

120%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2008 2009 2010 2011 2012 2013 2014 2015

Primary Deficit (excluding bank support) (% GDP) Interest-growth rate differential (% GDP)

Other factors (% GDP) Deficit-worsening Bank Recapitalisation (% GDP)

change in debt ratio Gross General Government Debt (% GDP) RHS

Relative Hourly Earnings (Manufacturing)

- Ireland versus main trading partners

11

90

100

110

120

130

Consumer confidence

Growth & Unemployment

Consumption & Credit

Housing market

Eurocrisis

Ireland on an export-driven path to recovery

Current account as % GDP

-7

-6

-5

-4

-3

-2

-1

0

1

2

t-3 t-2 t-1 t t+1 t+2 t+3

Finland Ireland Sweden

Source: AMECO database European Commission

70

80

90

100

110

25

30

35

40

45

2002 Q1 04 06 08 10

per c

en

t€b

illi

on

Exports (lhs)

Exports/GDP (rhs)

11 Q4

Some necessary regulatory reforms

• MUCH higher capital requirements – in particular for systemic banks

• Liquidity regulations – limit short-term market funding

• More powers to regulators – including a "macroprudential" mandate

• Efficient resolution schemes - credible burning of bondholders in all banks

Thank you