The rollout of NAMA has left a bitter taste in the mouth of many who may be wondering just how it all came to this. First announced in the Budget of April last year and with the first bailouts loans given to EBS and Irish Nationwide on the 30th of March this year, the first anniversary of its announcement sees the country in no better position than before with many of the “green shoots” predicted having withered and died. So how exactly did it all come to this? And who exactly killed the Celtic Tiger?The answer to that question is not an easy or quick one but encompasses a triad of circumstances which lead to the collapse of the Irish economy.
The beginning of the recession, which was officially announced by the government in September 2008, was a first in a number of ways. The announcement made Irelandthe first Euro zone economy to announce a recession in that year as the bottom began to fall out of the housing market. It was the first time since the 1980’s that the country had experienced recession- it also came after the first economic boom the country had ever experienced since its independence in 1922.
The boom, which began in 1993, saw the rise of employment, prosperity and the GDP. Coined the “Celtic Tiger” by UK economist, Kevin Gardiner, in 1994, the boom hinged largely on building development and mirrored the quick and unexpected economic growth of several Asian “tiger” economies.
While industry was not solely reliant on building to begin with, with many foreign companies enticed into the country with tax breaks, the reliance on building for employment quickly gained massive momentum. Between 2000 and 2005, the labour workforce increased by 258,000- of these, over 30% (76,000) of the workforce was employed in the construction industry.
In total, more than 1 in 8 people (12.6%) were employed in construction, 4.6% more than the EU average. The number of people employed in the workforce in 2005 almost matched the entire increase in employment with a staggering 242,000 people employed in construction.
With such emphasis on construction, it was inevitable that prices would begin to rise. Such was the emphasis on building that house prices began to mushroom as consumers became as invested in property as the builders were. Consumers were advised to invest their increased incomes in property and many did, buying second homes and rental properties which relied on the rental income to pay the mortgage.
Customers were encouraged to borrow heavily to finance their purchases- hugely unsustainable borrowing meant that by December 2008, the Gross National Product included a €400 billion sum of personal debt. Much of this was personal mortgage debt which had multiplied to an enormous amount at the height of the boom. Between 2000 and 2005, mortgage debt had risen from €33 billion to almost €100 billion.
By this year, the tide had changed completely for construction, significantly when it came to the workforce. Six days before the first NAMA bailouts were given, the Central Statistics Office released figures showing the extent of the unemployment faced in the construction industry. They say that “more than 60% of the fall in male employment is attributable to a decline of 77,700 in the number of males employed in the Construction sector”.
The increased consumption of property would never have been possible without the willingness of banks to extend credit. As consumer spending increased, so did the use of credit cards and mortgage lending.
By August 2008, credit card lending had become so high that Goodbody Stockbrokers estimated that, per average household, €158 was being borrowed for every €100 earned. This starkly contrasts the more reserved approach to borrowing seen just over a decade before in 1995. In that year, the average household borrowed over €100 less per €100 earned- just €50 for every €100 earned.
The banks’ reckless approach to lending did not end in their attitude to the average consumer. The details of the major Anglo Irish Bank scandal which emerged in December 2008 rocked the already shaky economy.
The story first broke with the news that chief executive Sean Fitzpatrick had hidden a series of personal loans from auditors which he had defaulted on. The loans are calculated to have totalled €100 million. The borrowings included unsound speculative investments and a heavy spend on Anglo Irish stock, some 4.5 million shares on which Fitzpatrick spent €80 million.
The scandal surrounding Fitzpatrick’s borrowing was merely the tip of the iceberg, however. In the months that followed, details began to emerge of a so called “Golden Circle”. It was discovered that ten Anglo Irish customers had been loaned €308 million. This money was used to buy shares in Anglo Irish Bank, artificially inflating the worth of the bank’s shares.
Only four of the ten members of the Golden Circlewere ever named. The Sunday Times identified Gerry Gannon, Joe O’Reilly, Seamus Ross and Jerry Conlan as members of the circle. Each of those identified had an involvement in the overinflated property market, either owning large amounts of land and real estate or as property developers.
Of the four named, all had connections to the government party once credited with the success of the economy. Both Ross and Gannon are registered Fianna Fail donators. Conlan’s business partner is Fianna Failer Richard Conroy. As the owner of Castlethorn Homes, O’Reilly was indirectly implicated in the scandals surrounding the late Liam Lawlor, former Fianna Fail TD.
The unaccountability and close relationship between Fianna Fail and business interests was further highlighted outside of the Fianna Fail tent at the Galwayraces when details of then Taoiseach Bertie Ahern’s inappropriate monetary behaviour emerged. Following an investigation into alleged donations and unpaid loans, the Taoiseach resigned on May 6th, 2008. As well as departing from office, he departed from an unsteady government and a worsening economy.
As the bottom fell out of the housing market, the government and its resources came under massive pressure. By March this year, the unemployment rate had reached 13.4%.The government social welfare bill has been spiralling since 2008 and in the last two budgets, cuts were made to bring the cost down. Despite over a decade of prosperity, the government were forced to declare recession in 2008, having seemingly made no contingency plans in the event that the economic climate changed.
When one looks at the gross overspending of the government during the boom years, one cannot be surprised that there was nothing left in the coffers when the Tiger was on its last legs. Instead of saving some money and investing the rest back into the economy, the government invested heavily in a number of things.
By 2008, 800 quangos had been set up in the country, costing the country around €13 billion a year. Regulation of quangos was often haphazard with very little accountability for productivity. The Corporate Governance of Agencies in Ireland, found that many had free reign over their operation. “Very few agencies received rewards or suffered sanctions if they did not meet targets for policy outcomes,” it said.
The gross irresponsibility and reckless spending of quangos was most greatly highlighted when news of the FAS scandal came to light. Details of overspending came to light in November 2008, two months after the government had declared a recession. Officials in FAS were found to have been living luxuriously at a cost to the taxpayer for some time. One junket to the U.S.in particular, saw the spouses of officials being flown first-class, pay-per view movies being charged as expenses and trips to beauty salons being charged as the same. In 2007 alone, €5.7million was spent on travel and other expenses for a staff of 2,200.
Now, in April 2010, with the government stepping in to act as a “bad bank” for Anglo Irish Bank as well as for AIB and Bank of Ireland, the country has been forced to ask for help from the EU, with some speculating that the cost of bailing out the banks and building societies will reach €60 billion. That translates to a bill for every citizen of €6,000. This includes the controversial €22 billion cost so far of nationalising Anglo Irish Bank, a figure which may keep rising.
As many Irish citizens find themselves unemployed or trapped in negative equity mortgages and with the news that disgraced Anglo chief executive is still receiving an annual pension of €533,000, the Celtic Tiger seems to be dead for some but not for others. Is it fair that taxpayers will be the ones paying for those who picked its carcass dry?
–Erica Mills Media
ERICA MILLS 