## patrick-honohan-ireland-and-imf-trenches

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### Origins of the crisis
- The economy became overindebted as part of a price bubble and the construction boom.
- A sudden stop of the construction boom occurred when international confidence was lost.
- Irish tax revenue, heavily dependent on the construction boom, collapsed, “leaving a big hole in the government’s accounts.”
- Banks faced repayment difficulties as many borrowers—especially property developers and construction companies—couldn’t repay and “found difficulty also in financing themselves.”
- The government had guaranteed “all the liabilities of the banks,” which implied very large fiscal costs once banking failures occurred.

### Government response and timeline
- 2008: The minister for finance began corrective measures—fiscal measures, tax increases, spending restraint.
- 2009: The government laid out a multiyear program of fiscal adjustment, which initially encouraged markets.
- 2009–2010: Market confidence in the adequacy of measures deteriorated as markets realized banking failures would cost the government enormous sums and the underlying fiscal position was much weaker.
- Autumn 2010: Yields on Irish government securities in the secondary market “rose and rose.” Banks were unable to finance themselves, and it became clear that outside help was required to avoid “a kind of doom loop of higher financing costs and loss of access to the markets.”

### Choice to seek international assistance
- Continuing alone would have been “more costly than going into the program where we had assurance for three years of adequate funding at what in the end was an adequate, sufficiently low interest charge.”
- The IMF’s presence “captured the confidence of the nation to a surprising extent” by speaking plainly, sensitively, and directly.

### IMF role, program design, and negotiation dynamics
- The program was “substantially an Irish government program.” The government decided how the required adjustment would be divided between tax increases and spending cuts and within those categories, which taxes and which spending adjustments.
- Tension existed between lenders and borrowers over how long adjustment would take, but the size of adjustment was set and then allocated by the Irish government.
- Areas of disagreement:
  - Honohan “would have liked to have seen it start with lower interest rates.” That was “not possible at the time of negotiation,” but became possible “seven or eight months later.”
  - He would have preferred banks to be strengthened “by a direct infusion of capital or by some kind of insurance mechanism,” but both the IMF team and the Europeans considered that impractical.

### Public communication and political reaction
- Communication framing used by Honohan: the IMF would “provide protection for Ireland against the vagaries of the international financial markets,” giving “breathing space for the adjustment of the public finances, the economy generally, and the banking system.”
- Public political attitudes evolved in “three waves”:
  1. A sense that the boom was “too good to be true” and an inevitable adjustment.
  2. A search for domestic blame: “the banks, and it must be the developers, and it must be the government.”
  3. A shift toward searching for outside blame—blame on the European Union, on trends in globalization, on international financial markets.

### Recovery and outcomes
- No real pickup in employment or economic activity was seen until 2012; the slowdown and employment loss were described as “very, very severe.”
- By the end of 2013—“three years later”—Honohan reports that Ireland and its banking system “were able to stand on our own two feet.”

*Source: Patrick Honohan interview, Finance & Development, December 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/december/patrick-honohan-ireland-and-imf-trenches.pdf_