Twenty years ago this month, the Celtic Tiger died. It was not until two years later, August 2008, that the full depth and horror of the crisis became apparent with a run on the Irish banks. But the damage was done two years previously.
This is how bankruptcies happen: at first slowly, and then very quickly. August 2006 was the first month that house prices failed to rise. Once that occurred, it was all over, but most people, even Irish bankers, didn’t have a notion about what was going on.
In a highly-borrowed financial system like Ireland’s in 2006, where everything is cross-collateralised, and everyone has lent and borrowed against property, the machine doesn’t run on prices. It runs on the change in prices and, more accurately, the change in that change. When banks are falling over themselves to lend, they come up with “teaser” products designed to coax borrowers in with artificially low interest rates, on the understanding that those rates might go up in the future. But by this point, the “assumption” was that higher house prices would make it easy to refinance the loan.
The most notorious of these was the tracker mortgage – the single biggest destroyer of Irish wealth ever conceived. However, there were similar “teaser” loans at every tier of the pyramid. Using teasers, banks financed the developer and the builder with money it had borrowed. The banks also lent to the ultimate home or commercial office buyers via various tracker mortgage and structured loan products. Once that structure becomes the banking business model, the entire edifice is not designed to be repaid but to be refinanced again.
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So the developer would borrow millions at low interest rates to buy the already inflated site; the builder would also borrow heavily to finance the construction cost; the investor or homeowners would be coaxed to buy via tracker mortgages, which were designed to take advantage of historically low interest rates. The understanding from both the banks and the borrowers was that these loans would never actually be paid off but would be refinanced as house prices rose, meaning there would be more “equity” wealth in the house, site or commercial building. As property prices rose, there would be more “room” to refinance after a few years.
The flaw – the explosive device – hidden in such a financial system is that it doesn’t just need property prices to be high; it demands that the pace of acceleration keeps rising to keep everything refinancing. It wasn’t falling prices that upset this game; it was when it became apparent they were not rising fast enough. When the pace of rising prices started to decelerate, the bomb was detonated. This began in August 2006. Once that happened, mass defaults were certain because the entire structure was built on the assumption that everything would be refinanced again and again.
Twenty years later, we are still paying for the Celtic Tiger because the banks and the financial system have not recovered from the trauma. Back then, the weakness in the system was too much lending. Today, it is too little bank lending. The banking system is not functioning. It is not recycling credit; in fact, the opposite is true. Irish deposits are getting stuck in the banking system, which has become a large safe deposit box where Irish money goes to die.
Bank credit to construction fell from a 2008 peak of €10.2 billion to a trough of roughly €700-800 million, and has barely recovered since. Bank credit to the construction industry is down 87-88 per cent in nominal terms, worse in real terms once construction cost inflation is accounted for. Broader business lending fell 55 per cent from its own 2008 peak and has flatlined for more than a decade – through the recent domestic boom, the Covid-19 pandemic, and now a complete European Central Bank (ECB) easing cycle. This isn’t a slow post-crisis recovery – it’s Irish private money dying.
With bank financing retreating, something else has had to fill the gap: cash flow, retained earnings and outside equity. Foreign investors supplied 72-78 per cent of Irish property and development finance through the late 2010s. But the State has also quietly become a lender of last resort to the Irish property market with our various public sector bodies and their silly acronyms providing funding to the construction sector – Ireland Strategic Investment Fund’s (ISIF) €150 million home builder fund, Home Building Finance Ireland’s (HBFI) €3.78 billion in loan approvals, the Strategic Banking Corporation of Ireland’s (SBCI) €4 billion in facilitated lending since 2014, the Land Development Agency’s (LDA) €1.35 billion drawn from ISIF and the National Treasury Management Agency (NTMA).
We are witnessing a State takeover of the construction industry. This is what socialism looks like, and it is happening under a so-called centre-right coalition Government.
Our interest rates are set by the ECB, and in recent years Irish interest rates have halved from 4 per cent to 2 per cent in 2025. When interest rates fall, small businesses (SMEs) should theoretically borrow to expand, and yet in Ireland SME bank debt kept shrinking through the entire easing cycle. It fell from €18.4 billion in Q1 2023 to €17.7 billion in Q1 2025. Repayments outpaced new lending in every quarter. Small Irish businesses are depositing more money into the banks than they are borrowing.
The reason why the country has never had more buoyant deposits but never had more anaemic lending is that the Irish Central Bank is not doing its job. The central bank is an essential element of Ireland’s national macroeconomic infrastructure, but it is restricting the flow of money into the economy by being far too cautious.
A healthy economy fights like a boxer with two fists: fiscal policy, a government’s tax-and-spend lever and monetary policy, the central bank’s decisions transmitted into bank credit. Ireland’s fiscal arm is landing punches – surpluses, record capital spending, two new sovereign wealth funds. Our monetary arm is not: it has been tied behind its back by the very institution that should be using it. The ECB has cut rates sharply since 2024, but Irish bank lending to the productive economy has barely moved. It has in fact never recovered from the collapse that began two decades ago this month.
Deposits are piling up far faster than loans are going out. Businesses are repaying debt out of their own cash flow rather than borrowing, and equity – foreign, state and retained earnings – has quietly taken over the job bank debt used to do. Irish money is now inert, and the economy is unbalanced, too dependent on fiscal policy which itself is too dependent on multinationals.
Twenty years ago, Ireland and Ireland’s banking system messed up. The central bankers at the time missed the whole “refinancing” debacle, not understanding – despite allegedly being in charge – that it was the change in property prices, not the level of property prices, that mattered. Chastened, the central bank has now tightened things up far too much and good businesses, start-ups and the construction sector that need cash can’t get it despite there never having been more money on the island.
We’ve learned our lesson. It’s time to move on.
