WHEN THE GAME CHANGES

A PATH TO RECOVERY AND RENEWAL

FOR THE IRISH ECONOMY

Ronald Greenspan
Senior Managing Director
FTI Consulting

March 26, 2009

the i ss u es b eh i n d the hea d l i nes

TABLE OF CONTENTS Introduction...................................................................................................3

The intrinsic strengths of the Irish economy.....................................................4

Current situation.............................................................................................5

The tipping point.............................................................................................6

Government response to date..........................................................................7

Framework for immediate action.....................................................................8

Resolve the banking crisis.........................................................................8

Rebuild confidence and goodwill ............................................................ 11

Address public finance and regulatory concerns....................................... 12

Conclusion.................................................................................................... 15
 INTRODUCTION The world is in the midst of a crippling recession and financial crisis which has brought
with it a systemic de-leveraging, restructuring and outright re-invention of the global
marketplace. Despite the recent rise of protectionist rhetoric, if ever there were doubts
about the interdependence of the global economy, those doubts have been put to rest
for good. While the degrees and timing vary, every developed country is experiencing
economic pain and struggling with finding hindsight explanations, short term cures and
long term solutions.

Ireland is no exception, and in fact it encountered severe economic challenges – and

enacted dramatic solutions – earlier than most other economies, including its peers in the
European Union. It was the first euro zone economy to enter recession, the first to inject its
own capital into its banking system, and the first to introduce dramatic restrictions to its
public spending programs. As such, its economic challenges and responses thereto are more
advanced than many other Western nations.

Now, in some ways, Ireland finds itself economically trapped. The industry sectors which
had helped fuel its record growth – real estate, financial services and export manufacturing
– are the primary sources of its economic problems today. Further increases in government
spending to stimulate the economy are impractical or unavailable due to deterioration
in public finances, rising borrowing costs, and a perceived risk of default. However,
the government has taken strong action to date, and we believe additional action, if
coordinated and communicated thoughtfully, can sow the seeds of genuine recovery.

The current scale and globalization of problems are unique, but the pathways toward
recovery have been put to the test repeatedly and always involve fixing the banking system
and restoring confidence within all constituencies. This paper provides a framework for
immediate action, based on FTI’s decades of experience advising governments and financial
institutions facing comparable situations. Our recommendations center around three key
themes:

Resolve the banking crisis

Rebuild confidence and goodwill for long term recovery

Address public finance and regulatory concerns

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 3
 INTRINSIC STRENGTHS Global economic platform and unique potential as “gateway to Europe”
OF THE
IRISH ECONOMY Educated, open and creative workforce with proven ability to adapt
to economic dynamics and support inward investment
History of strong democratic institutions, social collaboration, and
public-private partnerships
As with many other developed economies today, Ireland is struggling with one of the most
severe economic setbacks in its modern history. It has been hit by a “perfect storm” of
economic calamities, including failures of the banking system, GDP contraction, sprawling
government deficits, and a reputational crisis of confidence among both global investors and
the domestic population. Combine these dramatic threats with a broad global recession and
financial crisis and Ireland’s challenge of recovery appears extremely daunting; if one were
to believe some accounts in the mainstream media, recovery is nearly impossible. However,
given our experience advising governments and private institutions through major financial
challenges and transformations, we are confident that Ireland will persevere through the
current economic crisis and emerge a stronger, brighter, more confident nation on the world stage.

When we study the fundamental strengths and underlying assets of the Irish economy, we
identify a variety of attributes which, if harnessed and managed properly, can serve as
building blocks in a coordinated effort to achieve short term stabilization and long term
recovery. In fact, these same attributes are largely responsible for Ireland’s record growth
over the two decades culminating in 2007 and can serve to fuel not just domestic economic
recovery but a furthering of Ireland’s strong position in the global economy.

­— Fully globalized economic platform. Ireland’s strength in export manufacturing has

positioned it as a valuable link in the global supply chain, and its geographic location and
English speaking population make the country a reliable “gateway to Europe,” particularly
for U.S. businesses. According to the United Nations, in 2007, foreign direct investment
(FDI) equaled 81 percent of Ireland’s GNP. (See Figure 1)

— Highly educated, open and flexible labor market. Ireland’s highly skilled workforce has
a proven ability to adapt to changing economic conditions and engage with government
to form and accept important workforce related policy solutions. This is evident in the
scale and speed of the cost adjustment currently underway across the economy and the
general public acceptance of its necessity.

— Relatively low government debt entering the current crisis. Even in the midst of the
current economic crisis, Ireland’s sovereign debt-to-GDP ratio was still projected to be
a relatively low 41 percent at the end of 2008.1 While this figure is set to rise in the near
term, it is lower than many other developed economies, including Germany, France and
the United States.

— Track record of innovation. Ireland’s strong educational infrastructure, entrepreneurial

culture and creative workforce have enabled the rapid development of knowledge based
industries, particularly over the past fifteen years, and remain the focus of the Irish
Government’s industrial development policy.

— Modern infrastructure. Throughout the economic growth phases of the past two
decades, the Irish government has invested heavily in important elements of national
infrastructure, including public transport, education, healthcare and communications,
among other areas. Today’s Ireland is built on a vastly improved and modernized
infrastructure compared to both the previous generation and many of its international
peers, particularly among the newer EU member nations.

— Strong democratic and social institutions. Ireland’s unique Social Partnership model
has been widely credited and respected for bringing together government, employers and
unions to negotiate workforce-related issues, including wages and working conditions.
The current crisis represents an important test of the effectiveness of this model of policy
formation and social responsibility.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 4
 — International goodwill. The envy of other countries of similar size, Ireland enjoys
widespread positive awareness of and sentiment toward its people and culture around the
world, most notably in the United States. This has resulted primarily from an expansive
worldwide Diaspora. For two centuries, the Irish have made the world their home, in the
process spreading goodwill and establishing critical mass in many of the world’s major
economies. The current crisis demands that now is the time for that goodwill to be harnessed.

We believe that Ireland’s current economic turmoil results not from any fundamental shortage
or lack of the core assets required for economic prosperity, but from a number of specific
financial industry attributes and regulatory weaknesses. This means that a well designed and
broad based recovery effort can be effective. Thoughtfully capitalizing on the positive assets
inherent in the Irish economy—both those listed above and others—will be essential for
Ireland to navigate the short term crisis and rebuild its platform for long term recovery and
economic growth.

Figure 1: FDI as Percentage of GDP, 2007

160 %
2007 2000
140%

120%

100%

80%

60%

40%

20%

0%
Singapore
Netherlands
Ireland GNP
Ireland GDP
Hungary
Switzerland
Sweden
New Zeland
UK
Denmark
France
Spain
Finland
Poland
OECD-27
Germany
Italy
US
South Korea
China
India
Source: Forfás Calculations; UNCTAD World Investment Report 2008 Japan

CURRENT SITUATION Economic dependence on real

estate, financial services and export led manufacturing
Recessionary “triple play” of excessive risk, inflated asset values,
and global contraction threatens to erode global competitiveness
Strong government response to date must be extended in a more
integrated manner
Ireland has experienced two distinct phases of spectacular growth over the past two decades.
The first, beginning in the mid-1990’s, saw the expansion of the financial services sector
and the formation of a robust export led manufacturing economy, both driven in part by
government tax reductions, particularly on corporations and capital gains. This period of
growth also harnessed a massive competitive advantage in terms of the country’s high skilled,
lower wage work force which was essential to attracting development investments from multi-
national corporations. The second growth phase, largely taking place from the early to middle
part of the current decade, saw the furthering of export led manufacturing but this time
accompanied by a strong rise in real estate demand and home values. This phase was fueled by
a low interest rate environment resulting from Ireland’s membership in the European Monetary
System, widespread access to credit, and aggressive lending practices by the country’s largest
banks. By the middle of this decade, Ireland’s construction sector comprised 23 percent of
GDP, the highest such concentration in Europe (see Figure 2). According to the Irish Central
Statistics Office, one in five private sector workers depended on the construction sector for
employment.

As a result, by 2007, in our view, the structure of Ireland’s small, open economy was
dangerously skewed toward—and dependent on—continued inflation of property values
and activity in the construction sector. While this phenomenon was also present in most

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 5
 other developed economies, particularly the United States, Ireland’s small and less diversified
economy was more vulnerable to reversals in these areas and the inevitable international
systemic shocks. In addition, the other pillar of Irish expansion, export led growth in
manufacturing, further increased vulnerability as the country’s main trading partners were
themselves hit by the most severe economic downturn since World War II.

Figure 2: Construction as Percentage of GDP, 2005

25 %

20%

15%
% of GDP

10%

5%

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The Tipping Point
As was the case in the United States, the aggressive risk taking of Ireland’s financial system
to fund the over heated property sector led to a housing bubble which was increasingly
vulnerable to collapse. At its peak in 2006, the Irish residential property sector saw the
creation of 90,000 new units. In contrast, by 2009, fewer than 23,000 units are expected to be
completed.2 The decline in home prices began in early 2007, and average prices are expected to
fall by more than 40% when all is said and done (see Figure 3). By early 2008, the real estate-
related losses inflicted on the major Irish banks were severe, and their share prices plummeted,
ultimately destroying nearly 90 percent of the market capitalization of the Irish banking
sector. The share price collapse of Anglo Irish Bank, the most aggressive real estate lender,
destroyed nearly €13 billion in wealth from its peak in 2007 (see Figure 4).

By the middle of 2008, the globalization of the credit crisis, which had begun in the United
States, compounded the effects on Ireland’s economy of its bursting domestic real estate
bubble and the deepening global Great Recession. The contraction of global markets was felt
throughout the export-driven manufacturing sector, the other major growth engine within the
economy. Ireland’s manufacturing advantage had already been weakened by a decline in wage
competitiveness since 2000 and the gradual decline of the value of the British pound versus
the Euro. The growth rate of exports, which had been 6.8 percent in 2007, fell to just over 1
percent in 2008 and is expected to be negative in 2009, potentially erasing all growth since 2005.3

The rapid decline of the property and export manufacturing sectors and the accompanying
crisis in the banking system sparked the current economic turmoil facing the country. For
the first time since 1997, the Irish unemployment rate crossed into double digits, reaching
10.4 percent as of February of 2009. Gross national product is forecast to contract by nearly
8 percent in 2009 and another 3.5 percent in 2010, one of the fastest paces of any developed
country. This decline brings with it a severe reduction in tax revenue, which was forecast to
drop as much as 24 percent in 2009 before the government’s recent actions.4 While Ireland’s
situation is directionally the same as most of its Western peers, it has been and will be
disproportionately affected by the ongoing global contraction.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 6
 Figure 3: Average home price, Ireland

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000
96 97 98 99 00 01 02 03 04 05 06 07 08 09
(projected)
Source: Reuters EcoWin

Figure 4: Share price performance, Irish bank sector

17.5
15
12.5
Price (€)

10
7.5
5
2.5
0
Vol (m)

25

0
2007 2008 2009
Date
Alglo Irish Bank Corporation PLC Banks (rebased)

The “triple play” of excessive risk, unsustainable asset price inflation, and global contraction has
Government
had a highly damaging effect on Irish society, setting up the economy for a protracted decline.
response
to date In an effort to combat the crisis, the Irish government has acted quickly on a number of fronts
and with a vast policy toolkit, including capital injections in national banks, guaranteeing all
bank deposits, public payroll reductions and many other items. Government should be praised
for its immediate use of policy to “stop the bleeding,” particularly when some of these policy
decisions were bound to be unpopular and controversial. Indeed government had no choice
but to act immediately, and in some cases with very little historical precedent, such as the full
nationalization of Anglo Irish Bank.

However, the threats to economic stability—let alone recovery—are as present as ever, even if
they have changed form to some degree. Government now must navigate two more emerging
threats to Ireland’s recovery efforts: the growing budget deficit, projected to reach 11
percent of GDP by the end of 2009, and deflationary pressure, with the consumer price index
projected to fall up to 4 percent by the end of 2009.5 These two threats in particular jeopardize
the government’s short term prospects for stabilizing the banking system and accelerating
economic recovery, and will have to be factored into the next phase of policy decisions.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 7
 FRAMEWORK FOR Resolve the banking crisis
IMMEDIATE ACTION
Rebuild goodwill and confidence for long term recovery
Address public finance and regulatory concerns
At FTI Consulting, our experiences with financial crises, both economy-wide macro economic
and company-specific micro economic events, have shown the importance of bold, decisive
and comprehensive action to bring relief and stabilization in the early stage of a crisis. It is
important—and reassuring—to remember that other countries similar in size to Ireland have
thrived following abrupt economic declines, including the Netherlands, Sweden, Denmark .
and Finland.

In the early 1990’s, Finland was struggling with its own credit and banking crisis, which led its
GDP to decline by 11.4 percent and unemployment to rise as high as 15 percent. Early in the
recession, the Finnish government prioritized two principles to guide the recovery process:
restore confidence and achieve stability. As government carried out major policy decisions,
particularly painful spending cuts to shore up public finances and a bank stabilization
program, these two guiding principles helped to ensure that the public felt a sense of
emergency, understood the required sacrifices, and accepted government actions as a catalyst
for long term recovery.6 After three years, an export led recovery was well under way and the
seeds of innovation and skills development were planted. Today, despite its relative small size,
Finland is widely regarded as an advanced knowledge economy, with Harvard Business Review
just this month ranking it the world’s second most innovative country after the United States.7

Compared with the early 1990’s, however, the world today is unmistakably interconnected and
Ireland is embedded firmly as a member of the global economy, subject to its whims and with
little control over its overall trajectory. In fact, according to the Economic and Social Research
Institute, Ireland is so internationally dependent that if the global economy were to grow 5
percent above trend, then Ireland’s gross national product would grow 7.5% above trend,
unemployment would decline by 3.5 percent and government’s need for borrowing would
decline by 3.5 percent.

However, waiting for the resumption of global economic growth is not an option. Hope is not
a strategy, as they say. The immediate threats to Ireland’s economy—bank instability, lack of
growth, and mounting budgetary deficits—are too great. Government has already taken bold
steps to alleviate stresses, but a great deal more is required. In the following pages, we outline
three key areas where government must act, supported by an all encompassing program for
engaging and communicating with domestic and international stakeholders.

RESOLVE THE Create system of evaluating, distinguishing, and prioritizing bank assets
BANKING CRISIS
Create clearinghouse or public exchange for transfer of distressed
assets designed to maximize economic value as determined on a case
by case basis
Distinguish between and deal forthrightly with banking industry
liquidity problems and credit-loss issues
Strengthen government oversight of bank asset resolution process
Unlike the recent banking upheavals in the United States and United Kingdom, the Irish
banking crisis is not related to exotic lending products and risks embedded in financial
engineering. Rather, it stems from excessively risky lending to construction and property
development companies and increasingly lax direct consumer lending practices, both of
which resulted from an aggressive fight for market share among the country’s top national
banks. Anglo Irish Bank, in particular, grew at 36 percent per year at the height of the cycle,
increasing its share of the market from 3 percent to 18 percent in ten years.8

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 8
 Unable to increase commercial loans at rates substantially in excess of the rate of economic
growth, banks increasingly lent against hard assets. Capital injected into this market, including
from international wholesale money markets, produced a self-perpetuating cycle of increased
values, allowing yet more lending and in turn pushing values even higher. However, as with
all asset-based lending, repayment is wholly dependent upon maintenance of asset values. The
inevitable collapse of the real estate bubble resulted in a dramatic decline in collateral values,
a dramatic increase in loan loss provisions, and, as a result of diminished capital resources, a
widespread freeze on credit in all sectors and the economic activity it helps to produce.

In response and to prevent a liquidity crisis, last fall the government took unprecedented
action by guaranteeing all bank deposits. This was followed by the complete nationalization
of Anglo Irish Bank in January of 2009 and a re-capitalization of the two other largest Irish
banks, Bank of Ireland and AIB Bank. While we believe these actions were necessary and in
fact courageous, the alarming result is that the value of total bank liabilities now guaranteed
by the government is double gross national product. This, combined with reduced confidence
in Ireland’s sovereign debt by international investors, has left the country highly vulnerable,
particularly in the face of further global and domestic economic decline.

The situation in Ireland’s banking sector generally mirrors the current situation in the global
banking system. The global banking crisis was initially manifest as a liquidity crisis—the
inability of banks to borrow from each other and in the credit markets and concern about
the stability of the depositor base—potentially leading to an uncontrolled “run on the bank”.
Aggressive, coordinated action by most of the Western banking regulatory authorities,
including raising or eliminating altogether limits on insurance of depositor accounts and
interbank transactions, ended this first stage of the crisis. However the official language of
policy-makers, and seeming government actions, continue to focus on liquidity issues. An
example is the U.S. government’s TARP program, enacted by Congress in October, 2008, and
continued discussions of how to remove “toxic” assets from the balance sheets of banks—as
if the exchange of cash for these assets will single-handedly transform the industry. Focusing
on liquidity was appropriate in the initial stages of the crisis when that was the problem,
and continued discussion of this topic is much easier for governments and politicians since
liquidity issues can be solved at minimum cost to the public. However, the global crisis has
moved on from liquidity, and the current phase must address the impact of actual credit losses
on bank balance sheets.

Create system of evaluating, distinguishing and prioritizing bank assets. With the initial
crisis abated, the critical question now is how best to stabilize the banking system and return
it to health—a necessity if it is to play its rightful role in promoting future economic growth.
Key to this task is dealing with the impaired assets which sparked the crisis: Ireland must
decide, as has been done in every prior modern banking crisis, how best to identify and value
these assets, how to maximize recovery with minimal damage to the financial and broader
economic systems, and how to distribute the ultimate economic losses fairly. How prudently
and effectively these issues are resolved will determine how quickly Ireland recovers and
how robust is subsequent economic growth. But even with good ideas, the sheer volume of
troubled assets held by the affected institutions presents a significant practical challenge to
implementing any program quickly. Many of the distressed assets will realize increased value
over time while others may not. From our experience, making these distinctions will require
that bank management—and government—have access to enhanced information and be
incentivized to make decisions which ensure the optimum economic outcome for the Irish
economy. Appropriate information will enable the primary actors to make better decisions and
the government to have an informed oversight role and enact policies which take into account
the long term recovery of the banking and financial system.

An array of political and social pressures will arise attempting to influence the resolution of
these assets. However, policy should be designed first and foremost to distinguish between
assets worth retaining for a long term resolution process and those assets whose social and
economic value are maximized through a short term maintenance and accelerated resolution
process. Information should also be made available to the general public to increase the
transparency of—and confidence in—the process.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 9
 An example of our experience with such a process is C-BASS, a New York-based holder of credit
sensitive residential mortgage assets. In 2008, C-BASS was in default on almost $5 billion of
bank debt and repurchase obligations. Its portfolio consisted of a broad range of distressed
assets including performing, non performing, subprime, Alt-A, second lien and other types
of residential loans, all of which needed to be assessed and segmented carefully in order to
maximize the collective economic value and long term recovery potential of the portfolio
through enhanced servicing practices, opportunistic market priced discounted sales, long
term earn-outs and a variety of other tools at our disposal. C-Bass controlled a best-in-class
mortgage servicing company, whose capital needs and threatened value deterioration made
it uneconomic to maintain as part of C-BASS. Therefore, while many of the assets were judged
to return maximum value by continued aggressive management and earn outs, the mortgage
servicing business was sold for over $400 million to Goldman Sachs. A favorable outcome is
only possible on an individual credit basis, and for the financial industry as a whole, if the
assets and liabilities are carefully analyzed and the most appropriate resolution technique for
each situation is employed.

Create clearinghouse or public exchange for transfer of distressed bank assets.

Hand in hand with the above, we recommend establishing a real estate clearing house, or
asset exchange marketplace, to facilitate the identification, segmentation, valuation, and
transaction of properties either singularly or as portfolios. In a time of less sophisticated
information technology, a similar exercise was undertaken by Resolution Trust Corporations
(RTC), which was established following the collapse of the savings and loan industry in
the United States in the late 1980’s and early 1990s. Despite two failed attempts prior to
constituting the RTC, and slow start even for this entity, ultimately it proceeded with what
has been widely viewed as an effective and expedient resolution process that led to economic
recovery. Information and auction technologies which have developed in the fifteen years
since the completion of the RTC’s efforts would make these efforts even more efficient and
transparent today.

Distinguish between and deal forthrightly with banking industry liquidity problems and
credit-loss issues. As mentioned earlier, largely because the initial bold actions to address
liquidity issues were successful, liquidity is no longer the primary problem preventing the Irish
banking industry from recovering and playing its necessary role fostering broader economic
recovery. Instead, the problem today is one of actual credit losses and the corrosive effect
they have had and that future write downs will continue to inflict on bank capital. Unlike
relatively cost-free liquidity solutions, there is no low-cost solution to credit losses and
impaired capitalization—these are real losses that have been and will continue to be suffered
by the banking industry. Until government moves to address this issue and recapitalize the
banking system, the sector will remain weak, delaying a robust economic revival. The pace of
economic recovery will depend on the pace of educating the public and building a political
consensus around how these past and future losses will be allocated between shareholders,
creditors and the taxpayers; who will bear the economic risk of recapitalizing the banking
industry; and how the ultimate profits from the rebuilt industry will be shared. As part of
this process and a quid pro quo for what will surely be taxpayer contributions, government
must reassure the broader public that there exists a set of guiding principles such that the
resolution and rebuilding process will be structured with the proper incentives to ensure that
the final outcome will support economic regeneration and social priorities.

Strengthen government oversight of bank asset resolution process. We understand and

agree with government’s proposed approach of maintaining a distance from bank management
and demanding the boards of the institutions retain responsibility for the resolution process.
However, the unprecedented government financial stakes in these institutions also demand
a new structure of oversight. Either through a newly formed oversight board or through an
existing regulatory body, a singular guardian entity should be appointed to ensure that the
agreed asset resolution strategy is actually being executed, funding is getting to those who
need it, and government imperatives are being delivered at the consumer level. This oversight
panel in turn should be accountable to the legislature and the larger body politic.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 10
 Rebuild CONFIDENCE Create and announce a comprehensive, multi-year renewal campaign
AND GOODWILL
Embrace maximum transparency
Harness the nation’s goodwill around the world
Ensure fair retribution…later
Confidence in the Irish economy, and the investment opportunities it presents, has been
dramatically shaken at precisely the point in time when it is most essential. The Irish
population is confused and anxious about their quality of life and the fate of their competitive
position in the global marketplace. Global investors are pricing Irish debt investment
unfavourably out of fear of the potential of default. Multinational corporations are
questioning whether Ireland is a sufficiently stable place to conduct business. Addressing .
this widespread crisis of confidence is an essential and immediate step toward recovery.

We recommend that government introduce a bolder, farther-reaching public communications

strategy based on a credible, thoughtful plan with both short term and long term objectives
and expectations. In the absence of constant, day-to-day evidence of vision and leadership
from government, the media and public could remain dangerously obsessed with retribution,
with blaming bank executives, regulators and government officials for the crisis and
demanding “punishment” in any form available. It is the role of—and opportunity for—
government leaders to discourage such behavior and channel this national energy into a
forward-looking vision for the future of Irish prosperity.

While government’s aggressive capital spending campaign has introduced new programs to
help those in lower income brackets, first-time home buyers, and the temporarily unemployed,
these policies have been announced with minimal long term context. This also applies to
the global investor population, who have not seen sufficient evidence of government’s
comprehensive strategy for ensuring short term and long term stability—economically,
financially, politically and socially. Without communicating a bold long term framework for
recovery and clear criteria for decision-making, the trust of investors and the general public .
is likely to remain shaky.

Certain decisions and commitments are bound to have highly unpopular implications. One
controversial example of expenditure reduction was government’s decision in July, 2008 to
reduce public payroll by three percent across the board through a combination of taxes and
pay cuts. This generated significant protest, but has since been accepted as necessary action
designed to accelerate recovery and produce broader economic benefits for all. This fair and
widespread distribution of the economic burden is the spirit through which all policy decisions
should be communicated.

Authoritative and influential media are consistently critical of government’s initial process of
financial reform. The international reporting of regulatory failures and continuing stress in
Irish banking is eroding Ireland’s hard-earned reputation within international capital markets.
This is most apparent in the current cost of government debt, waning confidence from the
major ratings agencies, and other factors. Credible structural reform, properly communicated,
will be a first step towards rebuilding trust with international institutions. Once international
support begins to emerge, by any measure, it can be leveraged to reflect favorably on
government’s program of financial and economic reform.

Create and announce a comprehensive multi-year renewal campaign. To inspire

the nation’s population and earn back the confidence of the international community,
we recommend that Ireland launch a comprehensive campaign of communications and
engagement to demonstrate unprecedented commitment from government leadership to
fundamental economic reform and renewal. We recommend this campaign comprise a variety
of distinct efforts aimed at each of three key audiences with three distinct interests: global
investors, multi-national corporations, and the general public. Each audience should have its
own advocate at the highest levels of government who will offer ongoing day-by-day dialogue.
Government should report on campaign progress frequently including public disclosure of any
unforeseen setbacks as well as any and all positive economic data.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 11
 Embrace maximum transparency. Government should err on the side of over-communicating
when it comes to sharing its strategy, decisions, progress, and milestones. Effective
communications can rebuild trust quickly; performance, over time, will rebuild confidence.
By harnessing the power of technology, government can and should provide dedicated
web sites and direct electronic communications to the broad population, as well as venues
and materials tailored for the international community of investors and multi-national
corporations. A searchable public database of all public spending and investments, for
example, could be created and launched in the near-term. Resources will be required to fund
these efforts, but their costs will be minimal compared to the value of the goodwill earned. In
addition, we recommend that government adopt a coordinated communication program with
intermediaries, such as rating agencies, economic commentators, and financial journalists,
and any erroneous information published in the public domain should be quickly addressed
and corrected. In a practical sense this will require assembling and tailoring much of the
information already produced and making it available through key on-line “economic renewal”
information sites.

Ensure fair retribution…later. The public desire for immediate punishment of unethical and/
or criminal activity is natural and understandable, but government has a responsibility to
express empathy while encouraging patience in matters of retribution. The problem deserving
focus at the moment is the way forward toward stabilization and recovery; retrospective
retribution should come later and government must promise a fair process when the time
comes. It will be important to punish wrongdoers, but it is absolutely essential to institute
systems and regulations that effectively prevent a reoccurrence without choking off
appropriate risk taking and capital markets innovations.

Harness the nation’s goodwill around the world. Unlike most other countries its size,
Ireland enjoys massive cultural awareness and positive sentiment around the world, largely
due to the enormous Irish Diaspora. Like China, India and Latin America, Ireland’s built-in
“sales force” of expatriates can have significant impact on global perceptions and willingness
to help. Studies have shown that Diasporas can bring benefits in a variety of forms, including
remittances, knowledge and innovation transfer, direct investments, donations and word
of mouth support. This goodwill too often goes untapped, and now is the time for Ireland to
engage this community in a meaningful way.

ADDRESS PUBLIC Strengthen bank regulatory framework, ensuring separation of

FINANCE AND consumer protection and macro-prudential oversight
REGULATORY
CONCERNS Engage social institutions in fiscal policy and capital spending
As mentioned earlier in this paper, the recovery of both the Irish banking system and the
broader economy are highly dependent on the level of confidence felt by the general public,
international investors, and multinational corporations. While we believe resolving the
banking crisis is the most important and immediate action required, it also will be essential for
government to reassure these constituencies that it is actively addressing regulatory reform
and the increasing budget deficit, as both of these factors are integral to rebuilding confidence
in Ireland’s long term prosperity.

Ireland’s traditional bank regulatory structure consists primarily of the Irish Financial Services
Regulatory Authority (IFSRA) and the central bank. While neither entity can control interest
rates given Ireland’s membership in the European Union, they do collectively have a variety
of tools available for monitoring and managing the financial system, including the setting
and enforcement of lending standards. A lack of strong regulatory oversight of bank lending
practices was a key enabler of the over heating—and ultimate collapse—of Ireland’s real
estate sector, which in turn was a primary catalyst of the current economic crisis. In light of
these failures, government has already introduced a number of reforms and programs in areas
such as remuneration for senior banking officials, the appointment of independent directors to
bank boards, and the introduction of statutory codes of conduct. Moreover, the government
has formed a task force to review and institute comprehensive regulatory reforms.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 12
 We believe it is crucial that the government act quickly and decisively to announce and
implement major reforms in the regulatory framework. Further one-off actions will prove to
be ineffective unless they are communicated in the context of an integrated set of reforms
designed fundamentally to overhaul the financial system. Only such decisive change can
restore confidence among already shaky international investors in particular, who will be
essential for Ireland’s short term and long term economic recovery.

Strengthen bank regulatory framework. As is the case elsewhere, the new situation
whereby government is now both policy maker and a significant shareholder in most of the
major Irish banks has created particular regulatory complexities. In this new world, a new
regulatory framework must be established quickly to prevent the perception—and reality—.
of government having conflicting roles, having to balance the concerns of bank managers,
customers, taxpayers and shareholders. Such conflicts will compromise any efforts to rebuild
confidence in the regulatory function. We believe that given the current lack of confidence,
government must take unusual steps to engage the Social Partners and/or other influential
social, labour and economic organizations to provide input to the process. Government should
lead the process and make final decisions, but buy-in from the public is essential for success.
Moreover, government’s ultimate role should be designed to avoid direct management of bank
business practices; government should provide strong principled oversight rather than getting
involved with management functions which could be vulnerable to ongoing political pressures.
As an influential American journalist recently described the need for an overall financial
regulatory guardian: The question is how much power to give it. The easy answer: enough to
protect the system but not so much that it micro manages business executives or consumers
who may choose to take prudent risks.9

Separate the consumer protection function from macro-prudential oversight. In our

view, the consolidation of regulatory oversight responsibilities has proven to be less effective
than what is required. For example, early signs of macro economic and systemic stress were
not factored into oversight decisions on adequacy of reserves or of lending principles. In order
to distribute accountability more effectively, we believe that the twin functions of consumer
protection and macro-prudential oversight need to be carried out by separate and politically
independent entities.

In addition to strong regulatory protection, the state of public finances is also directly
related to consumer confidence domestically and investor confidence internationally.
Whether justified or not, the current perception of Irish sovereign debt having a meaningful
risk of default is anathema to the process of economic recovery and must be considered
in conjunction with all policy initiatives. In addition, the fear that government’s financial
position is producing strong deflationary pressure is further deteriorating confidence in
Ireland’s ability to reclaim a position of competitiveness in the global supply chain. These
matters demand immediate responses from policy makers.

The Irish government deserves praise for having initiated a variety of cost controls,
expenditure program reviews and financial emergency measures. Government has announced
extensive public investments totalling nearly 5 percent of GDP, the largest such program in the
European Union. As reassurance against the perception of careless spending, government has
also set a public target of keeping the general budget deficit limited to 9.5 percent of GDP in
2009 and reducing it to below three percent by 2013.10

However, there is much more for government to do before public finances can be considered
anywhere near stabilized. Even with optimal fiscal policy, government’s newfound ownership
and guarantee of bank assets means that the government’s capital requirements have
increased dramatically at a time when confidence in Ireland’s government debt has eroded.
To put it simply, Ireland’s ability to raise capital from investment sources is very limited and
very expensive. And the sudden emergence of a large deficit means a response and effective
communication program should be formulated quickly.

Engage social institutions in fiscal policy and capital spending. Perhaps the most significant
challenge in addressing the budgetary position is securing public support for decisions.
Given the intensity of the crisis and the sensitivity of taxpayers and the investing public, we
recommend that government work closely with the Social Partners and other influential social

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 13
 bodies to review the level of required resources to support the national infrastructure and use
rapid, yet thoughtful, consensus-building to agree major fiscal policy decisions. In this manner,
tax increases and targeted spending reductions are more likely to be accepted as a rallying
cry for the nation to unite behind reforms and recovery. In addition, government’s aggressive
capital spending programs can be refined and positioned as targeting the most critical areas
of national infrastructure, such as energy, communications and transportation. However, it is
important to caution that open negotiation and third party validation must not be allowed to
delay decision-making.

CONCLUSION Ireland will emerge and recover from the current economic crisis. While we recognize that the
“Great Recession” is thrusting national economies around the world into uncharted territory,
we believe that Ireland has the intrinsic economic assets which, if managed properly, will
enable short term stabilization and long term economic recovery.

However, it cannot be over-stated that economic recovery is dependent on the stabilization

and reform of Ireland’s banking system, in terms of troubled asset resolution, recapitalization
and regulation, and the rapid rebuilding of confidence within both domestic and international
stakeholder communities, including consumers, corporations and investors. These priorities
must be addressed as quickly and thoughtfully as possible, with a view toward producing the
maximum impact in the immediate short term.

While other economic threats—including the budget deficit, deflationary trends, and waning
global competitiveness—are adding significant pressure on government decision-making and
policy formation, we believe that these threats can in part be alleviated by repairing the
banking system and restoring confidence with a view toward restarting growth. Economic
growth will improve employment, increase tax revenue, and deter deflation, but such growth
will not come until and unless the banking system is stable, sound and trusted.

WHEN THE GAME CHANGES—A PATH TO RECOVERY AND RENEWAL FOR THE IRISH ECONOMY 14
 AUTHOR BIOGRAPHY Ronald Greenspan is an internationally renowned finance and business reorganization
specialist with extensive hands-on experiences resolving the periodic banking crises over the
past three decades. After leading a US based Savings & Loan Association in the 1980’s, he was
chosen in 1992 by the Resolution Trust Corporation (RTC) as the Real Estate and Business expert
on its first Settlement Workout Asset Team (better known as SWAT Team) and, following its
very successful operation, was appointed to the RTC’s initial California SWAT Team to handle
the RTC’s largest and most problematic asset resolutions.

As one of the world’s leading financial institution and restructuring experts, Mr. Greenspan
was appointed leader of PriceWaterhouse’s Asian Financial Advisory Services Practice during
the “lost decade” of the middle and late 1990’s where, amongst his accomplishments, he was
the financial advisor structuring the first portfolio sale of troubled Japanese bank debt by the
then largest Japanese Bank, Bank of Tokyo. With the merger of PriceWaterhouse and Coopers
& Lybrand to form the largest global business consultancy, he was appointed the Global Leader
of PriceWaterhouseCoopers’ Real Estate and Financial Institution restructuring practice until
Ronald Greenspan
that group was sold to FTI in 2002, where he leads the Real Estate and Structured Finance
Restructuring Practice. As he has for the past 20 years, he currently is advising on many of
the largest and most complex global and domestic real estate and financial restructurings,
including such well-recognized matters as Lehman Brothers, the largest firm ever for file
bankruptcy.

Mr. Greenspan is well published in leading industry publications such as TMA Journal of
Corporate Renewal, ABI Journal, American Banker, Daily Bankruptcy Review and the Urban
Land Institute. He is frequently quoted in the Wall Street Journal, Barrons, Bloomberg News
and other leading financial periodicals. Following his 1998 work successfully reorganizing
CriimiMae, then the largest participant in the Commercial Mortgage Back Securitization
market, in 2000, he published an article in the American Banker ominously warning about
the next, potentially much larger mortgage backed securities crisis. While prophetic,
he acknowledges that the ultimate size and global implications of the crisis we are now
experiencing extend beyond even his predictions.

Mr. Greenspan has his law degree magna cum laude from Harvard Law School and his
Economics degree summa cum laude from UCLA. He is a frequent lecturer at some of the
most important educational conferences dealing with the current crisis, including the past
two annual conferences of United States Bankruptcy Judges, the 9th Circuit Chief Judges
Conference, and Reuter’s 2008 European Mortgage Fraud and Recovery Conference in London.

WORKS CITED 1. Monthly Economic Bulletin, Ireland Department of Finance, March 2009.
2. Monthly Bulletin, Irish Central Bank, January 2009
3. Monthly Bulletin, Irish Central Bank, January 2009
4. Irish Economy, March 2009, Pat Mc Ardle and Lynsey Clemenger, Ulster Bank.
5. Irish Economy, March 2009, Pat Mc Ardle and Lynsey Clemenger, Ulster Bank.
6. “From bust to boom: the Finnish economic recovery in the 1990’s”, speech by Finland
Minister for Foreign Trade Jari Vilén, Union International Club in Frankfurt am Main,
November 20, 2002.
7. Harvard Business Review, “Tapping the world’s innovation hot spots,” John Kao, March 2009
8. Sunday Business Post, “Ireland in Crisis,” Patrick Honohan and Philip Lane, February 28, 2009.
9. The Wall Street Journal, David Wessel, “Preventing the next fire while this one blazes,”
March 12, 2009.
10. Sunday Business Post, “Ireland in Crisis,” Patrick Honohan and Philip Lane, February 28, 2009.

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