Transcript Ireland GDP
Ireland’s Financial Crisis The Celtic Tiger Boom & Bust 2008 - 2011 By: Griselda Hernandez, Jennie Duong, Driss Elouartallani CAUSES OF THE CRISIS Low Corporate Tax Rate Low Interest Rates Liberalized Banking Regulation HOUSE COMPLETIONS, 1997- 2008 HOUSE PRICES, 1970 - 2008 REAL INTEREST RATE, 1990 - 2007 LOAN APPROVALS, 1970 - 2008 TYPE OF CRISIS Asset Price Crisis When asset prices are driven well above their fundamental economic values. Debt Crisis After government intervention it turned into Ireland’s debt crisis which had to be bailed out by the EU and IMF. IMPACT ON THE AGGREGATE ECONOMY In 2007 the housing market started to correct itself. Interest rates began to increase The Economy Became Affected by the shock of the sub-prime financial crisis and the recession in Ireland’s main trading partners, Britain and the USA. IMPACT ON THE AGGREGATE ECONOMY IMPACT ON AGGREGATE ECONOMY 2008 The economy contracted by 1-2.5% Domestic Demand Fell Sharply Low Consumer Confidence THE CELTIC TIGER The term to describe Ireland’s rapid economic growth in 1995 to 2003. It evolved from one of the poorest Western Europe countries to one of the most successful. Had the second highest GDP within the EU. IRELAND REAL GDP Current Price level of GDP in Euros IRELAND’S UNEMPLOYMENT RATE Level of Unemployment (in thousands) CRASH OF THE IRISH BANKS CRASH OF THE IRISH BANKS (CONT.) Its government took on the liabilities of its oversized banks who also had lent indiscriminately throughout the Eurozone. Resulted in a loss of liquidity and market funding, and have made Irish banks overly dependent on capital from the European Central Bank. The government had to bailout the largest financial institutions in Ireland. BAILING OUT THE BANKS Sept 30, 2008 – guarantees all the debt and liabilities of the six institutions for €440bn. “The cheapest bail-out in the world”. Jan 2009 – Anglo Irish becomes nationalized, fearing it could collapse. Feb 2009 – Government gets a 25% stake in Bank of Ireland and Allied Irish. March 2009 - Standard and Poor's downgrades Ireland's credit rating from AAA to AA+ and says it may fall further. BAILING OUT THE BANKS (CONT.) Oct 2009 – The “bad bank” known as National Asset Management Agency is created to deal with the risky property loans. Dec 2010 - Nationalizes AIB. March 2011 - Ireland's central bank publishes the results of "stress tests" on its four remaining banks, estimating an additional €24bn injection of capital will be needed. Throughout 2008 – 2011: the government bails out the banks for a total of €70bn. WHAT DID POLICY MAKERS DO? Ireland is part of the European Union and is using the Euro. The EU implemented a pro-cyclical fiscal policy. All of the banks debt was guaranteed by Ireland’s government. The IMF and EU approved a three year bailout package for 85 billion. EU/IMF INTERVENTION Key Objectives: •Identify banks that are in trouble and return them to health through downsizing and reorganization. •Recapitalize banks and encourage them to rely on deposit inflows and market-based funding. •Increase bank supervision and regulation while introducing a comprehensive bank resolution framework. THE HARD TIMES AHEAD Reducing public expenditure : The size of the public sector will be reduced, and universal social welfare benefits will also be cut. Tax rates will increase. 45% of Irish households have not paid income taxes until now. Public debt will remain high for the next few years. THE HARD TIMES AHEAD (CONT.) Purchasing power and incomes have been reduced drastically for consumers. Jobs have been lost (especially construction) unemployment is high. Because of government budget cuts, subsidies, and government aid are drastically reduced, which greatly affects lower income families. People are leaving the country for better opportunities, 140,000 by 2012. THANK YOU QUESTIONS ?