Chapter 21 The Irish Crash of 2008 and its Aftermath

Chapter 21 The Irish Crash of 2008 and its Aftermath -...

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The Irish Crash of 2008 and Its Aftermath Chapter 21
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Road Map The Property Boom Coping With The Banking Crisis Coping With The Fiscal Crisis The Troika Agreement.
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Hyman Minsky, Charles Kindleberger (Manias, Panics and Crashes) 1. Displacement : Exogenous shock that alters the profit opportunities in one sector relevant to other sectors. 2. Credit expansion . Boom is feed by an expansion of bank credit. 3. Euphoria Irrational exuberance and speculation leading to “over-trading” and an overestimate of prospective returns. 4. Financial Distress Some event causes a change in the psychology of the market. 5. Revulsion Revulsion against commodities or securities leads banks to cease lending on the collateral of such assets. The Property Boom
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75.0 125.0 175.0 225.0 275.0 325.0 375.0 425.0 Real New and Second-hand house prices in Ireland 1975-2010 Real NEW House price index Real SECOND Hand House Price Index
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60 70 80 90 100 110 120 130 140 Residential House Prices (Nominal) I n d e x
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-25 -20 -15 -10 -5 0 5 10 15 20 All House Prices Annual % Change
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50 60 70 80 90 100 110 120 130 140 150 Dublin House Prices
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60 70 80 90 100 110 120 130 140 House Prices Excluding Dublin
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Feedback mechanisms amplified the boom. Rising tax revenues led to more public sector investment. Inward migration constrained labour costs and population growth added to investor confidence. Rising property prices improved the net worth of investors. Improved collateral and added extra leverage for more borrowing.
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There goes the pension fund! 0 5 10 15 20 25 Figure 21.3 AIB share price: 2003 - 2012 E u r o
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Funding The Domestic Banking System During The Boom.
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Commercial Bank Balance Sheet Assets Liabilities Deposits Reserves Loans Bank Bonds The Availability of Credit EMU: 1. Access to European financial markets at low interest rates. 2. Absence of exchange rate risk.
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Ten year annual growth rate in profit (before tax) of 39%. 21 years of successive profit growth.
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Anglo Irish Bank, the midsize Irish lender whose profligacy has come to symbolize the excesses of the real estate bubble here, is doing its best to find out. DUBLIN — Can one bank bring down a country? Support of Anglo Irish Bank Strains Ireland August 31, 2010
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Even in an era when capitalists went out of their way to destroy capitalism, the Irish bankers set some kind of record for destruction. Theo Phanos, a London hedge-fund manager with interests in Ireland, says that “Anglo Irish was probably the world’s worst bank.” Michael Lewis in Vanity Fair, February 2011 Anglo losses for 2009 and 2010 = €30 bn
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Small group of property developers acquired large and complex portfolios at astronomical values. International acquisitions in London, US and emerging Europe. Foreign property in holiday homes and buy-to-let.
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Even though there were internal emails within the regulator’s office about the Quinn position Mr Neary (the regulator) said he himself was not made aware of it until later.
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