Thursday 27 November 2014

Irish meltdown was world's worst since 1930s -- IMF report

Published 28/06/2012 | 05:00

IRELAND experienced the costliest banking crisis in an advanced economy since at least the Great Depression in the 1930s, a new IMF working paper says.

"Ireland's crisis, which started in 2008, is still the costliest since the Great Depression in terms of the economic havoc it wreaked on the country," according to the paper by International Monetary Fund researchers Luc Laeven and Fabian Valencia.

Ireland is also the only country in the world currently suffering from a banking crisis that features among the world's top 10 worst banking crises, the authors conclude, lending weight to the idea that our banking crisis is much worse than the problems in other countries.

The report comes as Environment Minister Phil Hogan warned yesterday that the country "just cannot continue to cope with very serious banking debt on top of sovereign debt".

The working paper, which does not reflect the official views of the IMF, takes a detailed look at 147 banking crises from 1970 to 2011.

The researchers conclude that bailouts often prolong a crisis because they stop banks recognising their problems.

"If macroeconomic tools are used to avoid a sharp contraction in economic activity, this may discourage more active bank restructuring that would allow banks to recover more quickly and renew lending to the real economy, with the risk of prolonging the crisis and depressing growth for a prolonged period of time," it adds.

Database

The researchers study banking problems under three headings -- fiscal cost, increased debt and loss of economic output. Ireland was in the top 10 in all three categories.

Other countries to suffer a major banking crisis since the 1970s include Indonesia in 1997, Argentina in 1980, Iceland in 2008, Guinea-Bissau in 1995, Congo in 1991 and 1992, Kuwait in 1982, Argentina in 2001 and Turkey in 2000.

The research also shows that September is the worst month for banking problems -- election years are also bad. "Banking crises tend to start in the second half of the year, with large September and December effects," the report adds.

In terms of fiscal costs or costs to the taxpayer, the continuing banking crises in Iceland and Ireland already rank among the 10 costliest crises ever and the bills continue to rise, the report notes. "Fiscal costs have reached very high levels in Iceland and Ireland in part because of the relatively large size of the financial systems in these economies, amounting to multiples of GDP."

Ireland and Iceland also feature among the 10 costliest banking crises in terms of overall increase in public debt, while Ireland and Latvia are among the 10 costliest banking crises since the 1970s when the loss in national output is measured.

Losses exceed 100pc in both cases.

"Ireland holds the undesirable position of being the only country currently undergoing a banking crisis that features among the top-10 of costliest banking crises along all three dimensions, making it the costliest banking crisis in advanced economies since at least the Great Depression. And the crisis in Ireland is still ongoing," according to the report entitled 'Systemic Banking Crises Database: An Update'.

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