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Over the last few weeks we have seen enormous pressure on the Irish economy and despite immense resistance from the Irish government the authorities have been forced to accept a EU/IMF bailout fund totalling £72 billion. This is a situation, which has been ongoing since the Greek debacle earlier this year, but what exactly caused the downturn in the Irish economy?

The basis for the Irish crisis

The Irish crisis can be summed up in one word, which is CONFIDENCE. Despite the fact that the authorities refused to even consider a bailout until just a few days ago there has been growing concern within investment markets that the Irish economy was struggling and the Irish government was not in a position to fund the required bailout of the banking industry. In a perfect example of investment markets effectively running the show, we saw investors moving to the sidelines and unwilling to fund Irish sovereign debt and interest in the Irish economy as a whole.

Once this confidence began to slip away it became very clear that the government and the business community in Ireland were not in a position to resist and no recovery plan seemed enough for investors. While many point to the Greek crisis just a few months ago as a precursor for the Irish problems there is no doubt that the European Union see Ireland as a major problem and one which could, if handled incorrectly, pull down the whole Eurozone.

The Irish economy

If you cast your eyes back just a couple of years to negotiations regarding the Lisbon Treaty you will find that Ireland was seen by many as a major breakthrough for EU ministers looking to begin the journey to what many see as a federal Europe. The Irish population initially rejected the Lisbon Treaty and then only after a forced rerun of the vote by the EU did the Irish population finally get behind the movement - with many believing the threat of a withdrawal of EU finances causing many to change their mind.

Since the massive influx of EU subsidies and EU financing to Ireland the economy has never looked back and Irish banks were at the forefront of the lending phenomenon prior to the credit crunch and worldwide economic downturn. However, even prior to the credit crunch there were major concerns that Irish banks were pushing ahead too quickly and offering rates that no other banks could compete with in what many saw as potentially "difficult" lending.

Over the last few months we have seen that much of the excessive lending handed out by Irish banks, often at uneconomical rates, was reckless at best and potentially criminal if the allegations with regards to covert lending and backdoor deals turn out to be true. Indeed while the Irish banking industry, and the Irish economy, was struggling from the economic downturn around the world we saw the added problem of bad debts and potentially illegal loans made to various directors connected with Irish banks.

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This forced the Irish authorities to step into the breach with many pointing the finger at Anglo-Irish Bank and the Irish Nationwide building society when the government was forced to step in with a multibillion-pound bailout package. Once the banking industry was on its knees investors quickly looked for the next target and all Irish banks quickly came under pressure and as the economy worsened it became more and more clear that, to a differing extent, there were literally hundreds of billions of pounds of bad debts within the Irish banking sector. Indeed it is believed that 70% of the non-mortgage loan book paid out by the Irish Nationwide building society will never be repaid.

Confidence in the Irish banking industry

Once confidence in the Irish banking industry began to disappear this placed more and more pressure upon the Irish government, having had guaranteed the deposits of banking customers. It soon became apparent that as the situation worsened within the banking industry, with many believing more bad news and more bad debts would follow, that the government would struggle to finance a strong bailout of the industry.

In many ways the investment markets acted as the tail which wagged the Irish Rover as the authorities continued to insist that no bailout was required but the rate of interest charged on Irish sovereign debt continued to rise higher and higher. As investors backed away from any investment in the Irish economy and the Irish government there was only one route left open and eventually the authorities were forced to accept a EU/IMF bailout package of £72 billion.

What does the bailout mean to the Irish economy?

While the true damage of the economic downturn and the collapse of the banking industry in Ireland will take many years to filter through the economy and population, there is no doubt that the country has been put back many years. Investors are still concerned, even after the £72 billion bailout, about the short to medium-term prospects for Ireland as it will take decades for the £72 billion in bailout funding to be repaid and there is also concern about the interest rate on this bailout fund that is approaching 6%. For some reason the Irish government has been forced to accept an offer which is higher than the 5.2% interest rate charged to the Greek government even though the Greek situation seemed to be much worse.

In simple terms, if the Irish banking industry is to survive there will need to be a major cutback in the number of banks and the number of companies operating in the country. A lack of immediate finance will also place pressure on Irish companies that are struggling from the general worldwide economic downturn not to mention the specific problems within Ireland. The reduction in finance for the business arena will again impact upon unemployment that will also impact upon tax receipts for the Irish government and leave significantly reduced disposable income for people to spend within Ireland.

Even though the situation will "bottom-out" at some point, there is no doubt that there is still much pain and much heartache for the Irish people, the Irish government, the Irish business arena and most of all for the Irish banking sector.

How will this affect people living in Ireland?

As we touched on above, a lack of funding from the Irish banking community and a reluctance of overseas investors to fund any expansion in the country will impact upon business growth in the short to medium term. This pressure will then be transferred to the employment market which is expected to struggle in the short to medium term which will obviously place more pressure upon every day bills such as mortgages and potentially lead to more bad debts for the banking community. As bad debts continue to rise we will see a greater reluctance for Irish banks to help those at the higher end of the risk scale therefore pushing more people and more businesses into troubled times.

The Irish government has also been forced to announce a €6 billion reduction in the forthcoming budget that will mean a massive reduction in spending on public services. As we have seen in the UK, not only will this budget reduction affect public services but it will also affect the various state handouts such as unemployment benefit, housing benefit and the like. There is no area of the Irish economy which will escape scot-free and those at the higher end of the income scale will also be asked to pay more in the future.

How will the collapse affect Irish citizens living abroad?

It was revealed that the Irish government was forced, as part of the bailout package, to hand over €17 billion out of the states national pension fund to help pay down debt and shore up the country's banking community. There is no doubt that the state pension will be under pressure in the short to medium term and those living overseas who possibly depend upon this payment will be impacted.

There is also concern that many Irish investors, a number of which live overseas, will have registered large losses on their Irish banking investments which had for many years performed very well. It seems that in the boom times a large number of the Irish population invested into the Irish economy via direct share investment and the creation of new businesses. A number of Irish banks will disappear in the short to medium term and the value of shares in the industry, as a whole will be absolutely decimated. In simple terms the Irish government has taken control of the whole banking industry in exchange for bailout funding which effectively leaves shareholders with no say in these operations.

When you also take into account the fact that many Irish expats will at some point look to return to their "homeland" this will not offer many attractions in the short to medium term as the bailout funding and the deal agreed begin to filter through the system and the population. It will be many years before investors regain their confidence in the Irish government and the Irish economy and with rumors of a new election in the New Year and possible conflict over the proposed €6 billion budget cuts we could see the Irish economy under yet more pressure in the short-term.

Those who have property in Ireland will also be suffering and those who are renting a property may well see pressure on rental prices and potential bad debts in the short to medium term.

The Irish property market

The Irish property market had been one of the boom areas of recent years with a massive increase in the number of homes across the country and a massive increase in the amount of investment in this area. Despite warnings some time ago that this situation could not continue forever and a day, buyers still continued to invest in the property sector despite sky-high prices. Once we saw the cracks in the Irish economy begin to emerge, then we saw the banking crisis, confidence in the Irish property sector literally disappeared overnight.

Many of Ireland’s best-known banks have been left with massive bad debts, many of which will never be repaid, and downward pressure on the Irish property sector continues. Many expats who have possibly rented out their Irish property or are potentially looking to sell in the future to fund their new life overseas have literally been hit for six and left with a major headache.

The future of Ireland

There is no doubt that the tail, which is the investment markets, has and continues to wag the Irish Rover with some people concerned that the EU/IMF bailout will not be enough. There is also a major concern that political friction could lead to the proposed €6 billion in budget cuts being put at risk. There is also concern that unless Irish political parties can come together and agree on the terms of the EU/IMF bailout it could be some time before the funding actually reaches Ireland. The longer this vacuum continues the more problems this will cause for the Irish banking committee, the Irish economy and the Irish population.

Many experts have said for many years that the Irish economy was growing too quickly and that reckless lending by the Irish banking community would one day come back to haunt them. All of these doomsday scenarios have now come true and despite the fact that the Irish government is still hoping to maintain the artificially low corporation tax, which has attracted many companies to the country, this seems something of a forlorn hope.

While for many investors the Irish problem is now yesterday's news, with emphasis now on Portugal and Spain, the massive multibillion pound bailout package and the surprisingly high interest rate of around 5.8% will cause reverberations across Ireland for many years to come. Whether Ireland will be the last EU member state to require a bailout remains to be seen but one thing is for sure, the Irish population, the Irish business community, the Irish government and most of all the Irish banking fraternity will never forget this downturn!