Ireland and the 2007–2009 Financial Crisis
From 1995 to 2007, Ireland had one of the highest economic growth rates in the world, with real GDP growing at an average annual rate of 6.3%. As a result, Ireland became known as the “Celtic Tiger,” and it became one of Europe’s wealthiest nations, with more Mercedes owners per capita than even Germany. But behind the scenes, soaring real estate prices and a boom in mortgage lending were laying the groundwork for a major financial crisis that hit in 2008, sending the Irish economy into a severe recession. Irish banks eased loan standards, offering to cover a greater share of housing costs and at longer terms. As in the United States, there was a housing price bubble, with Irish home values rising even more rapidly, doubling once between 1995 and 2000, and then again from 2000 to 2007. By 2007, residential construction reached 13% of GDP, twice the average of other wealthy nations, with Irish banks increasing their mortgage loans by 25% a year. With the onset of the financial crisis in late 2007, home prices collapsed—falling nearly 20%, among the steepest in the world. Irish banks were particularly vulnerable because of their exposure to mortgage markets and because they had funded their balance sheet expansions through short term money markets. The combination of tighter funding and falling asset prices led to large losses, and in October 2008, the Irish government guaranteed all deposits. By early 2009, the Irish government had nationalized one of the three largest banks and injected capital into the other two. Banks remained weak into the end of 2009, with the government announcing a plan to shift “toxic” bank assets into a government funding vehicle. The financial crisis in Ireland triggered a painful recession, among the worst in modern Irish history. Unemployment rose from 4.5% pre crisis to 12.5%, while GDP levels tumbled by more than 10%, and aggregate price levels fell. Tax rolls thinned, and the government struggled to close a yawning budget deficit, which reached over 12% in 2009, through higher taxes on income and consumption.