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Picking up the Pieces of the Irish Economy

All European nations have had to deal with significant financial woes from the economic tsunami. It has been a rough time for almost everyone, but Ireland seemed to be hit the hardest. Their banking systems were one of the first to declare recession. Green country has been well known for their agriculture contributions being the biggest part of their economy, but in the last 20 years they have tried to transform into an industry country with service and high tech sectors.

The five years between 1995 to 2000 are often hailed as the golden years of the economic growth of Ireland, suitably called the Celtic Tiger years that saw the country launch into continual and robust economic growth. With foreign capital and companies pouring into the country, inflation quickly reached an incredible high as property rates in Dublin climbed to 500% of their value. All predictions of the bust of the real estate bubble were ignored amidst the false sense of financial well being.

Several investors decided to purchase as much real estate as possible during the growth sector. Even then there were experts stating that the market would correct itself and be around 40% to 50%. This fell on deaf ears while investors continued to put down their own money and borrow even more funds. Lenders didn't think anything of it, but the economy soon started to overheat. Oddly enough the government was lax about the whole situation.

What led to the banking crisis in the country? While fingers will have to be justifiably pointed at all parties involved in the meltdown of the banking system in the country; three banks are often singled out as the major culprits, Anglo Irish, Bank of Ireland and AIB (Allied Irish Bank). However, a close scrutiny reveals that not only the lending institutions but also the government's lax attitude, the corrupt mindset of the media which prevented them from exposing the rising concerns about the economy and the attitude of the financial regulatory board that chose to turn a blind eye to the brewing crisis were all equally responsible for the debacle.

Do you know who or what started the fire? When looking back at the start of this economic turmoil, there were plenty of seeds to tell us where things were headed. However; the ruling party and financial governing body decided they were better off ignoring the signs. The development capital was raised during the rapid growth (which is normal) by the interbank market. It was normally offered on a 3 month basis, even though the borrower could take 2 or 3 years to repay the loan. So most of the liquidation these major banks had was only on paper. The actual money was being lent to retail borrowers, businesses, and other financial establishments.

It took awhile, but eventually the world interbank market was frozen and the Irish real estate sector collapsed. This was when Ireland realized the economic crisis had reached their shores. The majority of the liquidity of the banks disappeared and by 2007 the Irish banking sector was in deep trouble. They could hardly afford to finance their own day-to-day operations. Even then the regulatory board just sat there with their arms crossed. Seeing this, the government finally decided to take over.

Despite this, the stimulus packages failed to create a splash because the banks could no longer rely on its retail customers and its corporate borrowers. With a massive household debt of 190% of the payroll income, the Irish could no longer afford to pay for their indulgences as most of their pay cheques came from the real estate sector.

It was also realized that the corporate companies had diverted 28% of their lending capacity to the real estate companies. This meant an oversupply of land without any type of demand. The banks could have flexed their muscles and foreclosed on the properties, but it would have created even more panic in regards to the economic crisis taking place.

The impact of the banking crisis on the economy There was no stopping the recession that finally hit in Ireland. The banking crisis and poor economic performance of the EU countries took its toll on Ireland. By 2009 the growth rate went from 4% to a whopping 1.7%. By the time the recession hit the growth rate had reached -7.1%. In 2010 we did see a few sparkles along the way, but the spike was only marginal (.3%). By the end of the 2nd quarter it was at -1.2% for the first 6 months.

What was done about it? Despite the announcement of government aid and stimulus packages backed by the Irish states commitment to safeguard the banking system, the share value of the three banks in question plunged. Soon, the policy makers realized that recapitalization would simply not be enough, so in December 2008 it was decided that the Government would take preference shares worth 1.5 billion euro in the Anglo Irish bank, giving them the controlling stakes. The nationalization of Anglo Irish further pulled down the stock value of the other banks. Finally, in 2009 it was announced that the government would appoint 25% of the directors in these banks in return for two 3.5 billion euro stimulus packages.

The banks agreed to increase mortgage lending to first time buyers by 30% and a 10% increase in loans to small and mid sized businesses, as part of the deal. They also acceded to offering a 12 month grace period to defaulting home loan borrowers before repossessing the property.

What does the future look like? The National Recovery plan surfaced in 2011 to help get public finances and the national deficit under control. Whether or not it works remains to be seen, but the goal is to reach 3% by 2015 and make a budget adjustment of 15 billion euro over the four year time frame. It's possible that this will allow the Irish economy to grow by 3% this year alone. Unfortunately we have to wait and see whether or not it will all pan out. The good news is; they've seen their biggest output in the industrial area most recently.

Learn more about Irish payroll. Stop by Conor Kindel's site where you can find out all about theirpayroll bureau and what it can do for you.

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