Debt Quicksand Europe Fights the Growing Currency Crisis

By Carlo Angerer, and

Ireland: End of the Housing Bubble


Build them and they may not come: Property developer Johnny Owens does odd jobs around his nearly-deserted housing development in Mullingar, Ireland.
REUTERS

Build them and they may not come: Property developer Johnny Owens does odd jobs around his nearly-deserted housing development in Mullingar, Ireland.

How did the crisis start?

With extremely low interest rates, tax incentives and lax bank regulations in the 1990s, Ireland's government spurred a real-estate boom that saw home prices quadruple within just a decade. But when the global real estate market collapsed, mortgage-backed securities at Irish banks lost most of their value. In autumn 2008 the country's financial institutions were on the verge of collapse. The government took on junk bonds and pumped capital into banks until the state itself became financially strapped with debt exceeding 100 percent of the gross domestic product (GDP). Last November the country could no longer function without financial aid, and asked the European Union and the International Monetary Fund for money.

What has been achieved?

The European safety net saved Ireland. But Dublin still had to impose drastic austerity measures in exchange for loan guarantees worth some €80 billion. The government must also reduce its deficit to three percent of GDP (a level set by the Maastricht Treaty) by 2014. The financial restructuring has already had some positive effect -- the economy is improving thanks to booming exports. In the first quarter of this year it grew by 1.3 percent, the highest gain since 2007. Economists are already discussing potential dates for the country to leave the European Financial Stabilization Mechanism (EFSM).

What are the obstacles?

Unemployment is high and wages have tanked -- not a good indicator for domestic economic activity. State finances also remain wobbly. Because the government continues to back domestic banks, its solvency is tied to their fates. But they are still dragging billions of euros in real estate loans, which increases the interest that Ireland must pay for government bonds. Meanwhile on July 12 rating agency Moody's downgraded the country's bond ratings to junk status.

Ireland

Economic Indicators 2008 2009 2010 2011 2012**
Debt (in percent)* 44.4 65.6 96.2 112 117.9
Economic Growth (in percent) -3.5 -7.6 -1 0.6 1.9
Budget Deficit (in percent)* -7.3 -14.3 -32.4 -10.5 -8.8
Unemployment (in percent) 6.3 11.9 13.7 14.6 14

*Percent of annual economic output, **Forecast
Source: European Commission; As of May, 2011

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