The Irish Bailout of 2010

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Where this sits

Ireland's government and its banks, 29 September 2008

On the night of 29 September 2008 Ireland's government met to decide what to do about its banks. They had lent heavily on property, and as prices fell, the investors who lent to the banks had grown reluctant to renew their loans. The central bank and the financial regulator told ministers that all six banks were solvent: what they owned still covered what they owed. The banks were due to open the next morning.

The property boom and the 2008 bank guarantee

In the years before 2008 Irish banks had fed a property boom with credit. From the mid-1990s to 2006 house prices rose faster in Ireland than in any other EU country, and by 2007 building work employed twice the euro area's share of workers.

On 30 September 2008 the government guaranteed, for two years, almost everything the banks owed, from deposits to bonds, the IOUs they sold to investors; only one kind of their most junior debt, repaid last if a bank failed, was left out. The guarantee was meant to calm the banks' lenders. It also moved the risk: under it, a debt that a bank could not repay became the state's to repay. By the end of 2010 house prices were 38 per cent below their 2006 peak.

The cost of the bank rescues to the state

The guarantee did not stop the losses. The banks had lent most riskily on land and commercial property, and as their value fell, those loans went bad. In January 2009 the state took over Anglo Irish Bank. It put fresh capital, money to absorb losses, into five of the six banks, and in December 2009 it set up the National Asset Management Agency to buy their worst property loans for well below the amount originally lent.

Over 2009 and 2010 the state put about 46 billion euros into its banks, 29 per cent of a year's national income, its GDP. In 2010 the government's deficit, the gap between what it spends and what it collects, reached 32.1 per cent of GDP. Almost 20 percentage points of that deficit came from one-off support for the banks, the European Commission, the EU's executive, estimated.

Irish government debt after 2008

The chart shows Irish government debt as a share of GDP. Before the crisis it was low, and much of the state's revenue came from the property boom: in 2006 taxes tied to property deals, such as stamp duty and VAT on new homes, brought in 18 per cent of tax revenue. After 2008 those taxes collapsed, the recession cut the rest, and the bank rescues were paid for with borrowing.

Ireland became, in the words of the European Stability Mechanism (the euro area's permanent rescue fund), the first euro area country caught in a loop between its banks and its government. The bank losses swelled the state's debt. A bigger debt made lenders doubt the state. Lenders who doubted the state also doubted its guarantee, so they doubted the banks too, the Commission noted.