First, the socialisation of banks’ severe loan losses – in the first instance through the September 2008 guarantee and later through the unwillingness of our programme partners to consider burden sharing with unguaranteed senior bondholders – resulted in a very large infusion of public funds to restore their solvency.6 To date, the Irish State has injected € billion into the banking system, or approximately 40 per cent of 2012 GDP.7 The second factor is fiscal policy.
A stylised fact of many housing booms is that rapid growth of revenues makes the Government’s fiscal position appear much stronger than it is. Governments frequently respond by raising spending and reducing their reliance on revenue from non-property sources, while rapid nominal GDP growth erodes the debt-to-GDP ratio.