Is Ireland At Risk of a Financial Crisis?

I’m surprised nobody posted this. … ial_crisis
I didn’t realise that the deterioration in the current account was that bad!

It is the same old same old.

Ireland has been in a monetary and credit bubble, which drove asset prices up (most property, but also equities).

This led to what economists call a savings/investment imbalance. Net savings were less than net investment (Irish people were spending far more on consumption and capital goods than they were earning in income).

That shows up as a current account deficit. This is a standard macroeconomic result: CA=S-I.

Does it mean Ireland is in for a financial crisis? Look out the window, asset prices are now deflating and companies and households are increasingly feeling the financial pinch.

WHat you would normally see is that the currency would come under pressure (depreciate if floated, devalued if pegged or fixed, or interest rates would rise if a peg or fix was maintained). BUt Ireland doesn’t have a currency, so no problems there in that regard.

SO the currency can’t adjust, it means the “real economy” will adjust to force down local prices (of assets and goods and services and labour).

That means:

Output will fall (i.e. manufacturing, construction etc.)
Unemployment will rise
House prices will keep falling
Equity prices aren’t going anywhere fast

Yes, it looks awefully like a recession doesn’t it. :wink:

Sure it is, because it has been converted into private debt.

Just think of the excessive interest that people are paying on their debts as Tax paid directly to lenders and you see how it works.

(Perhaps that should read “interest that people are paying on their excessive debts”)


And made over 10x bigger…

Much like generals fighting the last war, the economists seem to have been predicting the last crisis. We may be about to experience the first time a country (more likely several countries) had an economic crisis under the weight of private not public debt.

Out of curiosity, why would (non construction related) manufacturing fall?

Two reasons.

The first is simply keynesian multiplier effects. Less construction ouput, less need for builders supplies, builders merchants, etc. etc.

While everyone has, rightly, been transfixed by asset price inflation, general domestic prices and wages have been increasing in Ireland relative to the rest of the world. It has experienced what is known as an appreciation in the real effective exchange rate. This has been going on for around 10 years. So traded goods industries will experience similar symptoms as the property market - prices now too high, adverse demand shock occurs, excess demand results, stocks increase, then output drops, idle capacity increases, prices forced down etc. until new equilibrium is approached.