IMF Lending Case Study: Ireland

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Over the two decades ending in 2007, Ireland transitioned from one of the poorest to one of the most prosperous countries in the European Union.
Growth averaged more than 6 percent a year.
Contributing factors: low taxes, moderate wages, and a young, well-educated workforce that attracted major corporations as a platform for exports to the rest of Europe.
Rapid growth fostered private exuberance and complacency among foreign investors, banks, and regulators.
Rising incomes and cheap credit fueled a real estate bubble.
Bank assets expanded to five times Ireland’s GDP.

The boom ended in 2007 as fragility in the global economy emerged.
Characterization by Derek Moran (Secretary-General of Ireland’s Department of Finance since 2014): “a perfect combination of a fiscal crisis, which was quite deep, combined with the domestic and global financial crises.”
As overseas liquidity dried up, bank losses on property loans mounted and the building industry collapsed.
Ireland’s budget deficit surged as tax revenues fell by 20 percent in just two years.
In 2008, the Irish government guaranteed the liabilities of the country’s six major banks.
Over the following two years, the government injected the equivalent of 30 percent of GDP into the banking sector.
In the last four months of 2010, €60 billion, equal to more than one-third of GDP, flowed out of Ireland.
Unemployment rose to 15 percent.

In November 2010, the Irish government sought assistance from the IMF and the European Union.
The IMF and the European Union together provided loans totaling €67.5 billion—equal to 40 percent of Ireland’s economy.
IMF recommendations and actions:
- Banks were merged and staffing was reduced.
- Over time, bank assets were aligned more closely with deposits.
- Experts from Norway and the United States advised on modifying loans and working with borrowers in mortgage arrears.
Fiscal consolidation measures implemented by the government to reduce the budget deficit over three years included:
- Increases in the value-added tax and carbon and motor vehicle taxes.
- Introduction of a supplementary personal income tax.
- Cuts in the civil service.
- Savings in capital spending.
The combined fiscal measures amounted to 8 percent of GDP.
The government preserved most welfare spending and consulted with stakeholders to gain public support for the measures.

By the end of the second year of the IMF program, in 2012, the Irish economy had begun to recover.
Early recovery indicators:
- Firms started investing.
- Unemployment began to decline.
- The government returned to the financial markets.
- Banks’ arrears halved.
- Home prices in Dublin began to improve.
By 2018, the unemployment rate had fallen back to less than 6 percent.
Assessment: Ireland’s crisis was swept up in the global financial crisis but had significant domestic roots; recovery required domestic solutions—restructuring banks, stabilizing government finances, and resolving a large volume of bad debts—while the IMF and the European Union provided loans and advice and the Irish government led the response.