The Irish banking sector bailout has come to the forefront of European worries due to the difficulties experienced with Anglo Irish Bank. The costs have risen dramatically on that specific bailout, and now stand at €25 billion, though could go higher.
Barclays estimates the costs of the overall Irish bank bailout are somewhere between 24% and 31% of Irish GDP. But look at how large a portion of that is taken up by Anglo Irish Bank.
And, of course that percentage, and the size of the bailout, could yet expand.
But this banking sector bailout isn’t just about a loss in immediate GDP, it is about a long term recalculation of just how large Irish GDP growth should be.
From Barclays (emphasis ours):
The ongoing macroeconomic downturn is not only the result of the adverse cyclical factors described above but it is also part of the structural changes required for the economy to adjust towards a more moderate medium-term growth path. Bank credit grew at a sustained annual average rate of 25% between 2002 and 2007. The rapid credit growth fed a housing price bubble (a cumulative 450% increase between 2000 and 2007), which in turn fed back into more credit growth. This led to a disproportionately large contribution by both the construction and financial sectors to the Irish economy and, consequently, to real GDP growth rates well above potential.
So Ireland need not only get used to a banking sector indebted and unable to lend and a government having to cut costs, but an economy that is, in the future, never going to be as good as it was before.
GDP growth looking meek, compared to the good old days.
The concern is that Ireland, in order to control the expanding cost of the bailout, weak GDP growth, and negative impact on its banking sector, may need to seek IMF help, according to Barclays, simply because “the government has very few options left of its own.”
Barclays don’t think that decision is needed now, or is imminent, however.