Ireland: bailout poster child, but hardly textbook

January 23, 2014

Amid the euphoria surrounding Ireland’s removal from junk credit rating status, it’s easy to get swept along by the consensus tide of opinion that the Emerald Isle is the “poster child” for euro zone austerity.

But were another country to find itself in Ireland’s unfortunate financial predicament now, few would suggest it follow the path Dublin took.

The Irish government assumed the entire nation’s private banking sector debt in 2008 after then finance minister Brian Lenihan explicitly guaranteed all bank debt in the country. It was hailed as a masterstroke at the time, but in an instant Ireland’s hands were tied and its options all but evaporated. Even the stuff that posed no systemic risk was put on the government’s – the taxpayers’ – books. This prevented the collapse of the financial system, but at a price: the country’s sovereign debt load almost doubled to around 100% of annual economic output, and in order to do that it was forced to take an €85 billion bailout from international creditors two years later.

Ireland has come through the other side. But for an open, flexible economy with attractive tax environment on the doorstep of a much larger economy in the UK, it could be argued that was never in doubt. The question is, at what cost.

By many measures, the economic cost has been high, as the following two charts show:

     

The economic collapse has had a social cost too. Youth unemployment rose above 30 percent and emigration among the country’s youth rocketed. By some estimates, around a quarter of Ireland’s 20-30 year olds have emigrated since 2008.

That’s according to Liam Delaney, economics professor at Stirling University. He welcomed this week’s credit rating upgrade from Moody’s to investment grade status, and is optimistic on Ireland’s future.

But he’s critical of its past, tweeting:

“Hope positive sentiment on Ireland is genuine sign of solid recovery but anyone putting Ireland up as model of crisis resolution is a moron”

He added:

“Could you have reconstructed it so that these debts were settled in a completely different way? You just wouldn’t try to do that again. You won’t find a serious economist suggesting the last six years was the way to do it.  The best way to look at Ireland is to look at type of debt that was generated and how it was settled … debt dynamics could have been a lot more favourable . Iceland and Ireland both had banking booms that defied logic, and the jury is still out on which has come out best. If the criteria for success is you go through an IMF programme and three years later you come out the other side, that’s setting the bar extremely low.”

“The mystery of Ireland is how it has worked.”

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