The Fiscal Cost of the Irish Banking Crisis in Comparative Perspective

It is useful to place the current Irish crisis into a comparative context.   In “Risk Management and the Costs of the Banking Crisis” [IIIS Discussion Paper No. 262 (published in National Institute Economic Review)], Patrick Honohan estimated that the mean fiscal cost of systemic banking crises to be 17.1% of GDP [narrow sample of 45 countries] or 19.1% of GDP [broader sample of 78 countries].  The respective median values are 13.2% and 15.5% and the upper quartile values are 16.7% and 27.7%.

It is notoriously difficult to calculate the total fiscal cost of a banking crisis  – as Reinhart and Rogoff have emphasised, there are substantial indirect costs since a banking crisis typically also amplifies recessionary forces, leading to a generalised decline in tax revenues.

In addition, the final fiscal cost may differ from the upfront fiscal cost, to the extent that there is ultimately a positive investment return on the fiscal injections.

The current projection is that the State injection into the banking system will soon stand at €33 billion or so. This is made up of €3.5bn preference shares in BOI (some of which will probably be converted into ordinary equity); €3.5bn preference shares in AIB (some or all of which will probably be converted into ordinary equity); €22bn in Anglo (€4 already put in + €8.3bn + an expected further €10bn); €2.7bn into INBS; and about €1bn into EBS.

€33 billion is about 22 percent of GDP (26 percent approx of GNP).  The injections into AIB and Bank of Ireland could ultimately deliver some level of payoff to the taxpayer, such that final cost could approach the mean value for a systemic banking crisis.  In the other direction, additional fiscal injections in the future would raise the total bailout cost.

I note also that the gross fiscal cost is not all paid out up front, in view of the strategy of using promissory notes.

[Clearly, it matters for this ratio whether it is measured vis-a-vis pre-crisis GDP or current GDP.]

Finally, the fiscal cost of the banking crisis is a narrow measure  –  many households and firms will also suffer private losses of various types.

22 replies on “The Fiscal Cost of the Irish Banking Crisis in Comparative Perspective”

Rather than work with a single set of figures, I sought to indentify best and worst cases and to use the average as the most likely. My estimated direct costs are €22.8 billion (best case), €45.0 billion (worst case) and €33.9 billion (most likely). They include a provision for Nama losses. Details at blog.

From: Systemic Banking Crises: A New Database, Luc Laeven and Fabian Valencia, IMF

“Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP on average, and can be as high as 55.1 percent of GDP. Recoveries of fiscal outlays vary widely as well, with the average recovery rate reaching 18.2 percent of gross fiscal costs. While countries that used asset management companies seem to
achieve slightly higher recovery rates, the correlation is very small, at about 10 percent.”

So what will our Debt/GDP look like at the end of 2010?

Here are a few stats:
* General Govt Debt was €106 billion, end of Dec.
* Debt/GDP ratio of 64.5%
* In Jan, NTMA estimated that the Govt deficit for 2010 will be €18.7 billion
* We also have promissory notes and building society investment of €10.1bn and a further €10bn likely for Anglo.
* Lenihan estimated GDP shall decline by 1.5% in 2010. That would lead to a €162bn sized economy

Add it all up, and we get to €145bn equal to 90% of GDP.

That compares to Govt’s forecast back in December of 78% and EU’s forecast back in the Autumn of 83%.

Imagine the impact if either NAMA or Anglo had to accounted for?


National debt may equal: €114bn at the end of 2010.

Anyone know who has all the money that the banks lost in the crisis and where are they keeping it. Is there some Dr Evil type genius orchestrating the whole affair? Surely it can’t all have been used up in big bonus payments.

@Brian Lucey
Ah Professor Lucey, you pluck another number from thin air. You deserve a job in Anglo. Could you post you model please.


Dealing with facts and reality – it is practically ALL sovereign debt – the entire indigenous financial system is effectively nationalized (but without the usual benefits of ownership such as access to real data and information) – whatever the ‘creative’ accounting used.

Breaking newz_1: Insurance on all bonds to the Emerald Isle drops to zero -shur, why bother, the Irish sovereign will cover everything – the capital floods in.

Breaking newz_2: The Northern Ireland assembly votes to transfer the 6 counties into NAMA – thus wiping out the 32% structural deficit with one shot. London praises the generosity of the Irish in these difficult times.

Breaking newz_3; through a ground-breaking use of a new cute-heuristic derivative, influenced by the quantum finance now in vogue, 2_of_7, as Gaeilge, has raised 200% of GDP on the bond markets by placing the entire island in hock – the prospectus – Headlined ‘Prime Development Land – Unoccupied’ attracts global attention.

Breaking newz_4: The Minister interviewed on Bloomberg – “What Crisis?”

Breaking newz_5: Lord Salisbury on F0x Newz – I was right on all those years ago …

Anglo Irish on its own comes in way greater than FF’s favourite foreign scapegoat of Lehman Bros which turned in a modest US$ 13.8 billion in losses.

Not a bad achievement for what used to be a mickey mouse bank.

Seanie is set to join the pantheon of great failures.

What is most interesting about the paper is that it describes the current crisis in most countries where much of the euphoria has actually related to the innovation in banking risk-management technology. The situation in Ireland was closer to a 19th century railway mania/fraud (Trolloppe: The Way We Live Now).


cYp on is mouthing the classic FF line that it is as bad everywhere else as here. You won’t be surprised that I don’t accept his argument.

Because of our unusual economy GNP is the appropriate measurement for Ireland, so we are at 26%. It is Irish taxpayers who have to pay for this catastrophe – not the people who keep the profits from FDI activity in Ireland.

So even in the broad sample, we are right up at the top of 3rd/bottom of the 4th quartile. However, 4th broad sample is only an estimate based on extrapolating data. The narrower sample is based on solid data.

Using the narrow sample of 48 countries, the 3rd quartile is [ 13.2% 16.7%]. We are way into the 4th quartile for his narrow sample which has the solid data.

So, we are close to twice that median in both samples: 13.2%(narrow) and 15.5%(broad).


I don’t think it’s grand… but some people are acting as though it were end of days

Since Dec 2008 we’ve known there was a whopping hole (that was never going to be covered by equity and other risk capital)… by Jun 2009 the size was becoming clear. Yesterday wasn’t really much news.

However in the context of other crises in the world… seems we’re not winning first place

It is not grand… we need to get to the bottom of it… and for me I remain angry (as I have done for years now) that the FR didn’t catch it:

1) Ignoring specific incidences of malfeasance
2) Ignoring the “canary in the mine” of massively expanding money supply fueling growth in one asset class
3) Being generally pretty dopey 🙂

Seems a little optimistic, given likely NAMA loses and probable decline in GNP/GDP.

However, much of the €33bn debt that we are paying back was lent into the Irish economy, so effectively, the ‘cost’ element is the interest and the portions of the capital that are no longer swilling around in the system.

Impossible to quantify, but a factor none the less.

Banking is a powerful weapon. Like pesticide, it can increase yields in the short term. In the long term, it kills off the predators that can keep the pests in check, so that when the pesticide has enabled the super pests, selected for survivability, to come, there is no defence and the crop fails again and again. What we call pesticide others call chemical warfare.

It is not like phythopthera. It is not entirely evil, few things are, outside of church or bad cinema. So it is attractive. To children. To money launderers. To the corrupt. To the greedy.

There are several types of banking: clearing and deposit is one. Pump and dump is the other. The only way to succeed with the latter is to make the victims intoxicated “at the pounch bowl”. As you see, all the techniques are so well known that have terms. Just like a mob movie. Study it a little more?

There is nothing that can save a nation determined to grow rich.

Just so we can absolutely clear;

the State will add €33bn in debt in order to bail-out bank shareholders and bondholders. This is true whether the debt is issued in the form of promissory notes, IOUs, or sovereign bonds

the State has removed €10.6bn from the economy of spending cuts and tax increases

gven that nominal GDP was €163.5bn over the course of 2009 and nominal GNP was €131.4, the bank bailout was 20% of GDP and the fiscal contraction was 6.4% of GDP (not including December’s effort)

for those who insist on using the GNP denominator, the proportions were 25% bank bailout and 8% fiscal contraction (it would be wholly inconsistent to use two different denominators for government finances and the bank bail-out, since both debts must be met from the same income stream, mainly taxes)

likewise, it is important to use nominal measures, since, unfortuantely the debts cannot be serviced in CSO-2007 euros, but must be met from the actual incomes received, by corporates, households and the government in 2009 euros and beyond. This inconvenient truth is regularly ignored by advocates of competitive deflation; real debts increase as prices and incomes fall.

the €33bn is a fraud in the strictest sense; ie payment of an extremely large sum of money for something that is worthless. Without the government guarantee all the shares in the banks receiving capital would be revalued at zero, likewise the majority of the bonds. The government has increased its stake in nothing

the €33bn is, and I know many are fond of these type of comparisons, equivalent to the 3 largest voted departmental spending areas combined, health&children, social&family and education&science, with room to cover arts, sports & tourism as well as the communicatiin, energy and natural resources budgets for 2009 too

if issued as 4yr debt (assuming a speedy resolution of the banking crisis) the annual cost would be €925mn, for 4 years, or more realistically, if issued at 10yrs, the annual interest bill based on prevailing interest rates would be €1.475bn, slightly more than the employment, trade & enterprise budget

it is hard to imagine which Irish entitities that could absorb all the additional State borrowing, implying that foreign ownership of Irish government (or quasi-goernment debt will increase). While there was a €29.3bn trade surplus in 2009, net factor income from abroad was -€31.9bn. Increased foreign indebtedness will tend to increase the net capital outflow via debt interest payments, pushing a (virtually non-taxed) export-led recovery even further back on the horizon.

@tull mcadoo
“the gnomes of Zurich or the Rothchilds”
Now I see how one gets sucked into believing all those conspiracy theories formerly scoffed at – could scientologists and the elders of zion be behind the whole damn thing..
So far only the bank execs and the excessive bonuses, some corrupt politicians, original land owners (who may overlap with the other two categories) are clearly identifiable in the Iris conext at least. Still a sizeable chunk somewhere else though … maybe the money trail is just impossible to follow ..

The debt burden will obviously fall on the entire populace. However if the developers plans had come to fruition and they had completed and sold all the houses and apartments at their projected figure then the debt burden would have equal to or in fact greater than is now the case. This debt would have been loaded on new homeowners over 30 years which would have in turn depressed the amount of money in circulation through discretionary spending. We can now say that 35,000 couples per year will pay an average of 150K less for their houses which is 5.25 billion over 10 years =52.5 billion. Subtract the residue of the billions generated by the boom which remain such as the motorways, bridges etc. and we are nearly back to square one.

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