How the collapse affects Ireland
Richard Moore
By Mary Jordan
Washington Post Foreign Service
Monday, October 6, 2008; A09
SUTTON, Ireland -- Denis Finn spent about $4 million on a grand house in this pretty seaside town north of Dublin three years ago, but it was the mansion's grassy grounds where he saw the real money to be made.
Ireland's "Celtic Tiger" economy was roaring, home prices were soaring and banks, it seemed, were lending generously to anyone with blueprints, a hammer and a bit of buildable land.
So Finn borrowed even more and sunk $1.4 million into what seemed like a sure bet: build two ultramodern, four-bedroom homes next to the rambling St. Lawrence Lodge and sell them for $2.4 million each.
But for Finn and others like him all over Ireland, disaster was just around the corner. The financial meltdown that began in the United States last year has spread worldwide, slowing foreign economies where people bought bad U.S. mortgage debt and pushing local financial institutions toward insolvency.
In countries such as Ireland, the punch has been twice as hard, because the faraway problems combined with homegrown ones that were just as severe. In Ireland, an overheated property market crashed and left banks saddled with massive amounts of bad debt.
This summer, as the Wall Street crisis came to a head, Ireland's did, too. The government announced that the economy was in recession for the first time in 25 years.
Last week, as the Irish stock market dived and some of its banks appeared on the brink of collapse, the government stepped in with a $550 billion guarantee of all deposits in six major Irish banks.
With credit dried up and house sales plummeting, Finn, a successful developer for more than a decade, could no longer afford to pay his bank loans.
His company went bankrupt and he dismissed his 34 employees. Finn made no money when he sold the old lodge, and then lost more than $1 million when the bank recently repossessed his two unfinished houses and sold them for less than half the price he had envisioned.
"I have never seen property values in my life go down, and they just took a nosedive," said Finn, a father of four. He said if the economy had not turned sour, he would be sitting on multimillion-dollar profits from luxury property sales. Instead, he said, he has millions in debt.
"I had a good little company; now everything is gone," Finn said. "It's just painful."
The Irish government's response to its financial crisis has surprised European leaders. It guaranteed all bank deposits, no matter how large, for two years -- a promise potentially worth more than twice the country's gross domestic product. On Sunday, German officials, in emergency meetings over their troubled banks, announced that their government would also guarantee private bank accounts.
"Without a stable banking system, we have no economy and no prospects. That is how serious the situation was," Ireland's prime minister, Brian Cowen, said after the plan was announced. "There is no doubt that this is a defining moment in our nation's history."
European leaders, who initially blamed their economic problems on contagion from the United States and its banks, are increasingly acknowledging that their own banks have been guilty of the same dangerous excesses -- with tens of billions lent for property purchases that have gone sour.
Irish economists and political leaders said much of the problem has resulted from reckless lending with virtually no down payments required. In many cases, banks were lending 100 percent of the value of property.
"This didn't fall from the sky. There are people who are up to their necks in profligate and greedy lending," said Ruairi Quinn, a senior Labor Party official.
Marie Hunt, director of research at CB Richard Ellis property consultants, said that when banks were handing out loans at 3 percent interest, and property values were rising 20 percent a year, it "looked like a no-brainer" for everyone to become a builder or investor.
Massive developments sprouted in once-sleepy Dublin suburbs. And in Ireland's fabled green countryside, "For Sale" signs became as common as sheep, as farming families offered up land to developers who could not seem to buy it fast enough.
The warp-speed construction of homes, offices and shopping malls led to a glut. Hunt estimated that commercial property values have dropped about 35 percent from their peak in 2006 and that residential home values are down about 25 percent.
The construction industry, a vital sector of the economy that employs one in eight people, has slowed down considerably. Joblessness has risen to 6.3 percent. The number of people claiming unemployment benefits rose at a higher rate in the past year than at any time since 1967.
In Dublin, thousands of housing units are empty. Buyers used to line up overnight for the chance to bid on newly offered properties. Now sellers are slashing prices and throwing in free appliances.
"People now look back on the 10 to 15 years leading up to 2006 as the Golden Age," said Geoff Tucker, an economist at the Hooke & MacDonald real estate firm. "Things are different now. There is a huge amount of uncertainty."
The growth in the Irish economy in the past two decades has created solid new wealth, and international corporations continue to open offices in a country that has transformed irreversibly from its agrarian roots.
Google, Yahoo and eBay have corporate headquarters in Ireland, and Facebook announced this week that it plans to open a Dublin headquarters.
But a huge number of Irish investors who bought at the top of the market are being slammed by the global credit crisis.
A few minutes' drive from Sutton's small town center, with its gourmet sandwich shop and designer clothier selling $300 blouses, is the village of Baldoyle.
There, a massive development called the Coast, which aimed to turn an old horse-racing course into more than 2,000 housing units, stands unfinished, its construction suddenly halted.
Ciara Doyle, 35, a social worker who is pregnant with her second child, lives in a three-bedroom duplex with a view of an unfinished block of homes, covered in scaffolding and untouched by builders for a year.
Doyle said that she bought her place two years ago for $665,000 and that now the same style of house is selling for $125,000 less.
Doyle said her family feels trapped. With the new baby coming, she would like to move to a bigger place but can't afford to take the loss.
"It really hurts," Doyle said.
But not everyone is upset about the tumbling home prices.
Lynda McAssey, 36, an aircraft interior specialist, is one of those who can now afford to live in this seaside town, only 15 minutes from her job. Before it became so affordable, she had resigned herself to a 90-minute commute each way.
She just bought her two-bedroom townhouse for $525,000. Not only did she get $140,000 knocked off the price, but the developer threw in kitchen appliances.
"The crisis is a double-edged sword," McAssey said. "A lot of people are suffering, but it worked to my benefit. I am happy."
But Finn's bankruptcy and the joblessness it led to is an increasingly common story. A building contractor in the 1980s, he jumped into the booming housing market in the 1990s and became a developer.
His specialty was luxury houses around the wealthy communities of Howth and Sutton. Irish investors were also aggressively sinking money into property in Britain, Spain and Eastern Europe -- places where prices have also fallen.
Finn said even people who knew nothing about real estate -- those who did not know "one end of a wheelbarrow from the other" -- were suddenly buying and flipping properties for healthy profits.
Finn hired a workforce of builders streaming into Ireland from Poland, Latvia, Lithuania and other Eastern European nations. He said many of them have returned home. In addition to his 34 employees, Finn's business was connected to about 100 subcontractors and suppliers, all affected by his company going bust.
The developer had loans with several banks, but one, ACCBank, part of a Netherlands-based banking group, called in its loans as the credit crunch took hold. He said he is angry: "They could have let me survive, but they didn't."
"They put a gun to my head," he said, forcing him down when no cash was coming in.
Aware that many people fault developers for recklessly overbuilding, Finn said he largely blames the banks for the current crisis: "It's human nature. If people are handing out money easily, people take it," he said.
Behind the counter at the Sutton post office, near the cheerful flower beds that mark the village center, Teresa Ryan said the Irish have seen bad times before. "We Irish don't panic," said Ryan, 52. "We're resigned that the good times are over."