IMF Lending Case Study: Ireland

May 2019

The rise of the “Celtic Tiger”

In the two decades ending in 2007, Ireland went from being one of the poorest countries in the European Union to one of the most prosperous. Low taxes, moderate wages, and a young, well-educated workforce attracted major corporations that saw Ireland as a platform for exports of manufactured goods to the rest of Europe. Growth averaged more than 6 percent a year.

But the extended boom also gave rise to private exuberance and complacency among foreign investors, banks, and regulators. Rising incomes and cheap credit fueled a real estate bubble. Vast lending on commercial and residential property expanded bank assets to five times Ireland’s GDP.

The implosion

The boom ran out of steam in 2007 just as fragility in the global economy began to emerge. “It was a perfect combination of a fiscal crisis, which was quite deep, combined with the domestic and global financial crises,” said Derek Moran, secretary-general of Ireland’s Department of Finance since 2014.

As liquidity from overseas investors dried up, bank losses on property loans mounted. When the property bubble burst, the building industry collapsed, hitting a significant portion of the economy. The Irish government saw its budget deficit soar as tax revenues plummeted 20 percent in just two years. In 2008, the Irish government guaranteed the liabilities of the country’s six major banks. In the two years that followed, it pumped the equivalent of 30 percent of GDP into the sector. In the last four months of 2010, €60 billion, equal to more than one-third of GDP, flowed out of Ireland. Unemployment soared to 15 percent.

The IMF program

In November 2010, the Irish government sought help from the IMF and the European Union, which together provided loans totaling €67.5 billion—equal to 40 percent of Ireland’s economy. On the IMF’s recommendation, banks were merged and staffing was reduced, and over time assets were aligned more closely with deposits. The IMF brought in experts from Norway and the United States to offer advice on modifying loans and working with borrowers who had gone into arrears on their mortgages.

After the banks, the second task was the country’s public finances. The government set out a plan to reduce the budget deficit over three years. This included increases in the value-added tax and carbon and motor vehicle taxes, the introduction of a supplementary personal income tax, cuts in the civil service, and savings in capital spending. Together, these steps amounted to 8 percent of GDP.

The government gained public support for these tough measures partly by preserving most welfare spending and consulting with stakeholders.

By the end of the second year of the program, in 2012, the Irish economy had begun to recover. Firms started investing, and unemployment began to decline. The government returned to the financial markets, banks’ arrears halved, and home prices in Dublin started to improve. By 2018, the unemployment rate had fallen back to less than 6 percent.

Ireland was swept up in the global financial crisis, but its problems were homegrown, and its return to economic health required homegrown solutions: restructuring banks, putting government finances back on an even keel, and working out a mountain of bad debts. The IMF and the European Union provided loans and advice, but the Irish government was always in the driver’s seat.