The Irish banking system faces acute strains and may require a phase of temporary nationalisation as the property slump leads to a wave of defaults…
Household debt has reached 190pc of disposable income, the highest in the developed world. Bank lending rose by 30pc annually. Construction reached 15pc of national income, with 280,000 employed there.
Prof Kelly said Ireland had lost 20pc competitiveness against its trade partners since the launch of EMU.
“We are going to see banks on life-support with very big bail-outs. The precedent for this is what happened in the Nordic countries in the early 1990s when they had to take over the banks. We may have to do something similar,” he said.
However, Sweden succeeded only after it left the ERM’s fixed exchange system and regained control of its monetary instruments.
The government is almost powerless to stop the downturn becoming a severe slump. “We’re in a classic post-bubble recession, yet we can’t do anything that a country would normally do in this situation because we’re inside the eurozone,” Prof Kelly said. “We can’t cut interest rates, we can’t devalue, and there is a lot less room for fiscal stimulus than people think. We’re stuck.
“We have a domestic recession now colliding with a global recession. It is the state of the banking system that will determine how terrible this will be, and frankly that is looking very shaky.”
Irish house prices fell 7pc last year. The pace of decline has accelerated so far this year. The damage is spreading to the broader economy. Unemployment jumped to an eight-year high of 5.2pc in February, from 5pc in January.
The Bank for International Settlements said in its latest report that there had been a surge in euro bond and note issuance in Ireland in the third quarter to $35bn (£17.4bn), up from $10bn. This is a huge sum for a country of 4.2m people.
Over 55pc of all mortgage loans are at floating rates, with several banks offering 100pc mortgages at the top of boom. Interest-only loans made up 16pc of the total borrowing in the third quarter of 2007. Anglo-Irish Bank, Allied Irish Banks, Bank of Ireland and EBS, all have a big stake in the property sector.
The establishment has pretended it’s business as usual. But the mood is now changing. The Irish Independent warned this week that the country is sliding into a serious slump.
“Look at all the signs: every single one is screaming that the economy is in big, big trouble. Housing market dead, new car sales dead, consumer confidence is dead, record job losses, exporters being killed off by a strong euro, fuel prices spike, housing repossessions increase,” it said.
It appears to reflect a distress move by banks to raise money for use as collateral at the European Central Bank after the credit crunch hit.
However, the country is the most exposed in the EU to both the dollar and sterling blocs, leaving it more vulnerable to trade and investment effects of the soaring euro.