Patrick Honohan, Ireland’s Financial Crisis and the IMF – IMF Finance & Development Magazine | December 2018
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- Patrick Honohan, Ireland’s Financial Crisis and the IMF – IMF Finance & Development Magazine | December 2018
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Bibliographic details
- Authors: Steve Dorst
- Published: December 1, 2018
Origins of the crisis
- The economy became overindebted as part of a price bubble and the construction boom.
- The construction boom stopped suddenly, and Irish tax revenue, which had been heavily dependent on the construction boom, also collapsed, “leaving a big hole in the government’s accounts.”
- Banks faced large losses as many borrowers—especially property developers and construction companies—couldn’t repay, and banks “found difficulty also in financing themselves.”
Government reaction 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.
- 2010: Market confidence fell away as markets realized banking failures would cost the government enormous sums and the underlying fiscal situation was much weaker.
- Autumn of 2010: Yields on Irish government securities in the secondary market “rose and rose”; banks were unable to finance themselves, creating risk of a “doom loop” without external action.
Decision to seek international assistance
- By autumn 2010 it became clear that “something had to be done” to avoid escalating financing costs and loss of market access.
- Honohan’s view: staying on Ireland’s own would have been “more costly than going into the program,” which provided “assurance for three years of adequate funding at what in the end was an adequate, sufficiently low interest charge.”
IMF role in communications and politics
- The IMF “captured the confidence of the nation to a surprising extent. They spoke plainly, sensitively, and directly.”
- Honohan explained to the public that IMF support provided “breathing space for the adjustment of the public finances, the economy generally, and the banking system,” enabling Ireland and the banking system to “stand on our own two feet” by the end of 2013.
- Political attitudes evolved in three waves:
- Initial sense that the boom had been “too good to be true.”
- A wave blaming banks, developers, and government.
- Later a shift toward seeking outside blame (European Union, globalization, international financial markets).
Areas of disagreement and banking strategy
- Honohan would have preferred the program to start “with lower interest rates”; this was not possible at negotiation but became possible “seven or eight months later.”
- He would have liked banks strengthened by a direct infusion of capital or an insurance mechanism; both IMF and European counterparts judged that impractical.
- Design of the recovery program was “substantially an Irish government program”; the government decided how the required adjustment was divided between tax increases and spending cuts, and choices within taxation and spending.
Recovery outcomes and timing
- No real pickup in employment or economic activity until 2012; the slowdown and employment loss were “very, very severe.”
- By the end of 2013—three years after entering the program—Honohan reports Ireland and the banking system were able to “stand on our own two feet.”
- Honohan retired from the central bank in 2015, “when the country’s recovery was well underway.”
Patrick Honohan interview, IMF Finance & Development Magazine, December 2018.
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