56 FINANCE & DEVELOPMENT | December 2018
IN THE TRENCHES
PHOTO: ALAMY/NIALL CARSON
Patrick Honohan explains how the IMF
helped Ireland overcome its ﬁnancial crisis
F&D: What were the origins of the cri sis in Ireland?
PH: e economy became overindebted as part of a
price bubble and the construction boom. And when
the global economic turndown ca me—in fact a little
bit before that—there was a general rea lization that
the Irish construct ion sector was too big, the prices
had moved too high, and there was a loss of interna-
tional condence. e construc tion boom stopped
suddenly. Irish tax revenue, which had been heavi ly
dependent on the construction boom, also col lapsed,
leaving a big hole in the government’s accounts. And
as the bank s realized that many of their borrowers
wouldn’t be able to repay, especially the property
developers and construct ion companies, they found
diculty a lso in nancing themselves.
F&D: How quickly did the government react?
PH: e Irish government’s reaction was quite
prompt. Already in 2008, the mi nister for nance
started to bring in t he corrective measure s—scal
measures, ta x increases, spending restra int. By 2009,
the government had laid out a multiyear program of
scal adjustment, which encouraged the markets.
But during 2009, and especial ly in 2010, the mar-
kets’ condence in the adequac y of these measures
fell away. e markets realized that the banking
failures were going to cost the government enormous
sums of money—the government had gua ranteed
all the liabilitie s of the banks—and t hat the under
lying scal situ ation was also much weaker and was
going to remain weak. S o, by 2010, there was a loss
of market condence in the government’s plan and
its ability to turn th ings around.
F&D: When did the government realize t hat outside
help would be needed?
PH: During the autumn of 2010, yields on Irish
government securities in the secondary market
rose and rose. e banks were unable to nance
themselves. It was clear that something had to be
done, or else the Irish economy as a whole would
get into a kind of doom loop of higher nancing
costs and loss of acces s to the markets.
F&D: Was there any alternative to internat-
PATRICK HONOHAN took over as governor of the
Central Bank of Irel and in 2009, as the country’s
nancial meltdown deepened. A s one of Ireland’s
chief nancial reghters, he directed eorts to
rescue the country’s bank s and had a leading role in
negotiations on a lending program with t he IMF,
the European Central Bank, and the Europea n
Commission. Honohan retired from the centra l
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 FitzGer ald. He has taught
at the London School of Economics, University
College Dublin, and Trinity College Dublin.