Breathing Space

• Author: Steve Dorst

Breathing Space Patrick Honohan explains how the IMF helped Ireland overcome its financial crisis

Steve Dorst

Patrick Honohan took over as governor of the Central Bank of Ireland in 2009, as the country’s financial meltdown deepened. As one of Ireland’s chief financial firefighters, he directed efforts to rescue the country’s banks and had a leading role in negotiations on a lending program with the IMF, the European Central Bank, and the European Commission. Honohan retired from the central bank in 2015, when the country’s recovery was well underway. He previously worked at the IMF and the World Bank and was economic advisor to Irish Prime Minister Garret FitzGerald. He has taught at the London School of Economics, University College Dublin, and Trinity College Dublin.

F&D: What were the origins of the crisis in Ireland?

PH: The economy became overindebted as part of a price bubble and the construction boom. And when the global economic turndown came—in fact a little bit before that—there was a general realization that the Irish construction sector was too big, the prices had moved too high, and there was a loss of international confidence. The construction boom stopped suddenly. Irish tax revenue, which had been heavily dependent on the construction boom, also collapsed, leaving a big hole in the government’s accounts. And as the banks realized that many of their borrowers wouldn’t be able to repay, especially the property developers and construction companies, they found difficulty also in financing themselves.

F&D: How quickly did the government react?

PH: The Irish government’s reaction was quite prompt. Already in 2008, the minister for finance started to bring in the corrective measures—fiscal measures, tax increases, spending restraint. By 2009, the government had laid out a multiyear program of fiscal adjustment, which encouraged the markets. But during 2009, and especially in 2010, the markets’ confidence in the adequacy of these measures fell away. The markets realized that the banking failures were going to cost the government enormous sums of money—the government had guaranteed all the liabilities of the banks—and that the underlying fiscal situation was also much weaker and was going to remain weak. So, by 2010, there was a loss of market confidence in the government’s plan and its ability to turn things around.

F&D: When did the government realize that outside help would be needed?

PH: During the autumn of 2010, yields on...