Turning Tigers into PIIGS: The Role of Leverage in the Irish Economic Collapse

Abstract

Purpose

This chapter examines the roles and challenges for the Irish economy in the aftermath of the collapse of the Celtic Tiger and the onset of the 2008 economic crisis. Specifically, it does review the role that Government, the Central Bank of Ireland, and the Financial Regulator had before, during and after the collapse of both the Irish banking system and property market. This chapter explains the drivers behind the growth of the Celtic Tiger and the sources of leverage that amplified the severity of the subsequent collapse. Specifically, this chapter focuses on the changes that have since been made and provides a review of the lessons that can be obtained from the collapse.

Methodology/approach

The results presented in this chapter are based on analysis of secondary sources and a literature review to determine conceptual and theoretical frameworks for identifying the specific issues that the Irish economy endured since the 2008 economic crisis and the red flags and signals that were either missed or ignored.

Findings

Combined with the subprime collapse of 2007 and the international sovereign debt crisis evident since 2008, Ireland and the actions of its regulators and policy makers undoubtedly generated not only a catalyst to financial ruin, but also an incubator to aid its severity. The precise drivers that created the Celtic Tiger remained unchanged and played a significant role in the subsequent collapse. Banks were leveraged towards the Irish property market and the role of leverage in financial markets created mispricing, to which the basic principles of the efficient market hypothesis (EMH) failed. This miscalculation of risk was severe and destructive for the real economy. The reward for this error was a place in history as an ‘I’ in the derogatory term ‘PIIGS’.

Practical implications

This chapter could be used as teaching material for undergraduate and masters programmes in economics and finance. It provides a response to further understand the behaviour of the Irish economy during the development of the Celtic Tiger and the subsequent financial collapse that enveloped the Irish state.

Originality/value

This chapter discusses the role of leverage throughout a financial system and the necessity for financial monitors to promote an environment of sustainability and financial endurance; that which can survive an international financial crisis event.

Citation

Corbet, S. (2016), "Turning Tigers into PIIGS: The Role of Leverage in the Irish Economic Collapse", Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery (Advances in Sustainability and Environmental Justice, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 21-55. https://doi.org/10.1108/S2051-503020160000018002