The autumn of 2010 will not fade from the Irish memory very easily. It was the time its banking system collapsed. As the country braces itself for the worst winter in recent memory, its leaders were forced to ask the International Monetary Fund (IMF) and the European Union (EU) for a ¤85-billion help which included a generous loan of 7 billion pounds from its former overlord, Britain. Its 13-year old Fianna Fáil government is now practically seen the end of its ill-fated tenure. The pride of the ‘Celtic tiger’ is now a thing of the past and would remain so unless its government and its people mend their ways. And as if adding injury to insult Dublin came to a grinding halt in the first week of December due to unrelenting snow storms. Locals say they have not seen so much snow so early in the winter.
The Irish, however, have more than the weather to complain about. The last two weeks of November also witnessed the whole of Europe panic over the banking crisis in Ireland and what this country of 4.5 million might do the 500-million strong EU. The jittery feeling was not completely unfounded. The six banks of Ireland, in their unbridled ambition to grow ended up over-exposing themselves in the property and construction market leading to their downfall. At the peak of this crisis, the loan-to-deposit ratio in Ireland’s banking system was 165 per cent.
Heard this before
A good part of Ireland’s economic and political history has an uncanny resemblance to that of India. Both were former British colonies. Both struggled for long to come out of the shackles that was their own making after the British left the respective countries. Both unshackled themselves in the early 1990s, that saw India emerge as the poster boy of economic liberalisation in Asia and Ireland came to be called the Celtic tiger.
While India came to be known for its well-controlled and closely-monitored banking system, which saved it during the 2007 global meltdown, Ireland allowed its banks to grow to a point of obesity. “We lost a run of ourselves” is something one gets to hear too often from bankers, businessmen and cab drivers on the streets of Dublin.
Property deals
“At one point we started selling property between ourselves and increasing the prices to unheard of levels. The rate at which farmers were selling their land to developers would have made their grandads turn in the grave,” says banker Fergus Murphy, chief executive of EBS.
With around 80 per cent of its citizens living in their own homes, Ireland tops this table of house ownership in the whole of Europe. Murphy also provides a historical perspective to the Irish’s obsession with property. During the British rule, the Irish were not allowed to own property. However, it was not the new-found freedom that made them obsessed with property — Ireland has been a free country for 88 years now. However, around the start of the millennium, the banks (two foreign banks and the local banks), with the unlimited resources at their command gave money to whoever asked and how much ever they asked. “At one point, we were giving 100 per cent mortgages on properties that were already overpriced,” says Murphy. There was instances of even 110 per cent mortgages, the little extra for furnishing the over priced properties.
“We were like a teenager who got a lot of money and splashed it out,” says Gerry Sharkey, who heads the growth market division at Investment and Development Agency for Ireland.
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Visible government hand
Through the nineties and early 2000s, Irish banks borrowed too much in the international markets, way beyond what they collected as deposits locally. The property-buying frenzy was fed between 2003 and 2007. Simon Carswell, a financial journalist with Irish Times and author of 2006 book on Irish banks titled Something Rotten says at the peak of the boom, 60 per cent of Irish banks’ exposure were property and construction related. This was a direct outcome of the government’s innumerable tax rebates that were directly connected to properties. There were tax reliefs for holiday homes, car parks, schools, nursing homes etc. Nearly 30 such packages were announced.
Though these tax reliefs were intended for regional developments across the island, they turned to be counter-productive in the end. When the property prices collapsed, the government was left with a ¤20 billion hole in its finances, according to Carswell.
By the time the government withdrew many of these reliefs, it was too late. “The government stopped pouring fuel into the fire when it was biggest,” Carswell says.
One of the first things the government of Ireland is expected to do is to “right size” its banks. This is a fancy way of saying to sell or liquidate some of them while parallely the National Asset Management Agency will absorb the bad bank loans at depreciated market prices by issuing bonds in its place. By the time the banking mess is cleared up, Ireland is expected to shrink its banking system from six banks to no more than four banks, with one being sold to private equity or merged with a stronger one in the list. At least one is expected to be liquidated.
The roar of the Celtic tiger that reverberated through the Nineties and early 2000s is now subdued. Fergus Murphy of EBS says his countrymen got too arrogant. In one of the recent Eurovoice music contests that witnesses European nations pit the best of their music against each other, Ireland, an usually enthusiastic participant, put a puppet turkey on a shopping cart as its entry only to be booed off the stage. “We became too cool and too arrogant forgetting who we are. We took the mickey out of ourselves (Irish for pulling a fast one),” says Murphy.
Summarising Ireland’s raise and final collapse, Sharkey says, “We lost the run of ourselves.” The massive depreciation in land prices, rent and fall in labour cost, he believes is a second chance Ireland is offered and this time around, its unlikely that the Irish will not grab it with both hands.