By Dr. Lynn Reaser
Ireland has reluctantly agreed to accept financial assistance from the International Monetary Fund (IMF), the European Union, and the European Central Bank. Although the country believed it could pay all of its loan obligations through next June, Europeans feared deeply that a further loss in investor confidence could spread throughout the continent.
The precise amount of the assistance is still to be determined, but it could be about $110 billion to $125 billion. This would be only somewhat less than the $150 billion package Greece received Ireland is taking steps to rein in its deficit which has now ballooned this year to more than 30% of gross domestic product (GDP). Significant tax increases and budget cuts will be implemented over the next four years, although political leaders hope to maintain the nation’s attractive 12.5% corporate tax rate.
How did this previous darling of Europe fall into such peril? From 1995 to 2007, the nation seemed to perform to perfection and was known as the “Celtic Tiger”. Technology countries, led by Intel, flocked to Ireland to set up operations. They were attracted by a young, intelligent, and English-speaking workforce, as well as the low tax rate. The country thrived, with real GDP growing at a real annual rate of more than 7.0% over that span of time.
Alas, exuberance careened into excess. Banks lent aggressively to property developers, feeding a bubble in housing and commercial real estate prices. Little heed was paid to credit worthiness or potential risk. Money was readily available and life was good. In fact, it was too good. Suddenly, the music stopped and real estate prices plummeted. Bank loans soured, compelling the government to try to backstop its lenders with loan guarantees. This deepened the public sector’s debt burden, which was already under pressure from the recession.
Two questions now arise. Can Ireland get its banking and public financial houses back in order? Will the contagion of investors’ fears that started in Greece now stop with Ireland or spread further to Portugal or Spain? Only time will tell.
Important lessons can be learned from this experience. Greed cannot ultimately survive where integrity, common sense, and hard work are required.