Ireland: Lessons from Its Recovery from the Bank-Sovereign Loop

Departmental Papers, October 23, 2015

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Ireland’s major property bubble burst coincided with the global financial crisis, plunging the country into a severe recession in 2008–10.
Public debt climbed rapidly as revenues collapsed and as banks’ rising loan losses increasingly required public support.
Following the Greek crisis in spring 2010 and emerging tensions in the euro area, a “sovereign-bank loop” emerged: uncertainty about banks’ health fed doubts over public-debt sustainability, which in turn amplified fears about the banks.
The government lost access to market financing at manageable interest rates, prompting external financial assistance.

Ireland entered into a three-year program supported by €67.5 billion of financial assistance from the European Union (EU) and IMF in late 2010.
The program’s three main goals:
- Restoring the viability of the banking system.
- Putting the public finances on a sustainable path and returning to market funding.
- Restarting economic recovery, including by improving growth potential.

A large bank recapitalization in early 2011 helped stabilize deposits and other bank funding.
The government’s access to market financing was progressively regained from mid 2012.
Ireland exited the program at the end of 2013 and relied fully on market financing at highly favorable terms.

The first signs of recovery were strong job creation starting in the second half of 2012.
Recent economic figures exceeded expectations, with growth of about 5 percent in 2014.

The Central Bank of Ireland (CBI), the Centre for Economic Policy and Research (CEPR), and the IMF organized a conference titled “Ireland—Lessons from Its Recovery from the Bank-Sovereign Loop.”
The conference was held on January 19, 2015, at Dublin Castle and brought together Irish government representatives, European officials, academics, journalists, private sector representatives, other stakeholders, and the IMF’s Managing Director.
Discussions were anchored by three papers by leading international academics, moderated by journalists familiar with the issues, and concluded with a high-level panel discussion by senior policymakers.

Subjects: Banking, Commercial banks, Financial institutions, Fiscal consolidation, Fiscal policy, Loans, Potential output, Production, Public debt
Keywords: banking system, cash injection, central bank, Commercial banks, DP, DPPP, Europe, financial crisis, Fiscal consolidation, fiscal policy, Global, Loans, output gap, potential GDP, Potential output, senior debt
Publication details: Pages: 137; Volume: 2015; Issue: 012; Series: Departmental Paper No 2015/012; Stock No: ILIRBSLEA; ISBN: 9781513587363; ISSN: 2616-5333; DOI: https://doi.org/10.5089/9781513587363.087

International Monetary Fund. "Ireland: Lessons from Its Recovery from the Bank-Sovereign Loop", Departmental Papers 2015, 012 (2015).