Ireland: Negative Fiscal Feedback Loop Linking Emigration and Bank Losses?

With the Irish election out of the way, three distinct but interconnected challenges need to be addressed. The first is to boost weak growth prospects, which are effectively dependent on external demand. The second is to resolve the banking crisis, with around €150 billion owed by Irish banks to the Central Bank of Ireland and the ECB and the cost of recapitalizing the banks standing at around 36% of GDP. Finally, the Irish state must restore fiscal sustainability to be able to regain access to private markets.

Unfortunately, a significant rise in emigration in 2010 could make these objectives even more difficult to achieve via a negative fiscal feedback loop. Increased emigration will reduce the demand for housing, thus further depressing real estate prices (see Figure 3). In turn, banks’ balance sheets would deteriorate, increasing bank losses and the need for further capital injections from the government. If the majority of emigrants are of working age, the ratio of working-age to non-working-age people in the country will fall, further reducing the economy’s productive capacity.

Components of Population Change (thousands of people)


Source: Central Statistics Office

In parallel with increased emigration, increased arrears on mortgages will add stress on banks. With interest rates likely to rise over the coming years, default rates on mortgages will also rise. The percentage of mortgages with arrears in excess of 90 days rose from 5.1% in September to 5.7% in December, hinting at further large increases ahead in banks’ losses.

Two characteristics of the Irish economy compound the pressure created by increased emigration: The significant segmentation of the labor market between high- and low-skilled workers; and Ireland’s competitive imbalances. Many of the emigrants are believed to be high-skilled—i.e. people with the education and resources necessary to take advantage of opportunities abroad—and these are precisely the workers that Ireland’s economy needs most to achieve economic recovery and restore competitiveness. (See related Ireland coverage.)

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE Clients: Eastern Europe Monetary Policy; Icelandic Policy Rate; Irish Fiscal Challenges