| Summary: | Prior to 2007, Ireland evolved from one of the poorest countries in Western Europe to one of the most successful (Dorgan, 2006). Now in 2011, in the aftermath of the global financial crisis, the Irish economy is financially crippled with a banking system completely reliant on government support. A financial sector bailout coupled with deteriorations in public finances has resulted in the Irish government accepting an €85 billion economic rescue package from the IMF and the European Central Bank.
The Irish crisis evolved from a traditional credit boom and bust. The cause of the problem was classic; too much property related lending into an unsustainable housing price and construction boom (Honohan, 2009, p2). Irish banks became heavily dependent on foreign wholesale borrowings as a method of expansion and when the international markets turned on the back of the US subprime mortgage sector collapse, a liquidity crisis emerged. To compound this difficult situation, as domestic property prices slumped, large asset value impairments threatened the banks with insolvency. In an attempt to stem the losses and dispel market fears, the Irish government intervened with financial assistance but such a commitment would prove unsustainable. Government fiscal policy had become extremely pro-cyclical and as economic growth receded, public revenues dwindled despite the fact that expenditures continued to rise. External assistance was inevitable.
This paper primarily attempts to elucidate how the Irish economy became to be in such a perilous condition. It offers an insight into how the Irish economy shifted away from being exports led towards a financial and construction orientated economy. Government regulatory bodies and economic policies are examined and the Irish banks are empirically analysed.
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