The near-death experience of the celtic tiger: A tale from Europe's sovereign debt crisis

In 2006 Ireland’s wealth per capita was only second to Japan’s, reflecting decades of extraordinary economic growth. With the exception of Luxembourg, its public debt ratio had become the lowest in the Eurozone. In a surprising development, however, Ireland was the first country to succumb to the repercussions of the financial crisis by seeking help from the Troika of Europan Central Bank, European Union and International Monetary Fund for its public finances.

This paper recounts Ireland’s odyssey from being the pride and envy of Europe to beggar status, experienced at breakneck speed, as seen through the eyes of the econometric model of the market for government bonds developed in Gärtner and Griesbach (2012). Using the regression coefficients obtained from panel regressions for 25 OECD countries for the time period 1999-2011, we simulate Ireland’s experience during the years 2007-2011 by plugging in Ireland’s fundamentals.

The exercise suggests that calling the Irish crisis a ‘sovereign debt crisis’ is a misnomer, pointing to the wrong culprit. In essence, Ireland’s drift towards sovereign default was triggered by and propelled from two sources. First, the direct consequences of the global financial crisis that drove Ireland into a severe recession during which incomes receded by more than 10%, which led to a severe drop in tax revenues and increased welfare spending. Second, the significant gap between the post-2008 increase in sovereign default risk that can be linked to macroeconomic fundamentals on the one hand, and the increase in perceived risk that shows in the movements of government bond yields and, particularly, in downgrades of Ireland’s sovereign debt rating on the other.