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Ireland's Reckoning

On the brink of accepting an international bailout, the former economic superstar of Europe may be going the way of Greece

On a Sunday morning in October, Simon Kelly sat in the breakfast room of Dublin's Morrison Hotel, looking eager to chat. Simon, 38, and his father, Paddy Kelly, 66, were once among Ireland's most audacious real estate developers. During the boom years, they borrowed around €700million from the now-infamous Anglo Irish Bank to buy golf resorts and build hotels. Today, the Kellys are €800 million in debt, Anglo Irish has been nationalized, and the Kellys' former assets litter the streets of Dublin. Discussing the Morrison, Simon says casually, "Oh, I own part of the hotel. Well, not anymore. Now, NAMA owns it."

The National Asset Management Agency, or Ireland's "bad bank," was created by the government in 2009 to help stanch a crisis within the Irish banking system that has pushed the country to the edge of insolvency. Ireland's finance minister appointed NAMA's board—a former bank manager, two accountants, and former government officials—which now controls hundreds of the developers' hotels, offices, and resorts. It remains to be seen whether NAMA will take over the rest of the developers' personal assets. According to spokesman Ray Gordon, "Where NAMA is unable to work with debtors [either by virtue of their refusal to cooperate or the hopelessness of their financial position], then NAMA will pursue all avenues to recover what they can for the taxpayer."

NAMA, excluded from Freedom of Information laws, is famous for its opacity. Its actions, meanwhile, have not stopped the momentum of the crisis. The Irish spent this past week bracing for the arrival of European Union and IMF officials to negotiate a possible emergency bailout of the Irish economy. Ireland has not yet asked for assistance, but in an interconnected euro zone, its neighbors may not allow it the luxury of resisting. "Ireland is our closest neighbor, and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," says George Osborne, the U.K. Chancellor of the Exchequer. "So Britain stands ready to support Ireland in the steps that it needs to take to bring about that stability."

Irish Finance Minister Brian Lenihan has pledged to work with the EU and IMF while asserting his country's stability. "Our budgetary policy has full confidence among European partners," Lenihan told reporters on Nov. 17. "But in relation to banking, steps taken to date require further support. What may be required may not be in fact an actual transfer of money now but a demonstration of how much money can be made available if further difficulties materialize."

The Irish government underestimated the severity of the crisis for the past two years. As of September, it had injected €45billion into its banks. NAMA says it will absorb an estimated €73billion in loans from the banks at a discount of about half of their value. It sounds like relatively small stakes compared with the U.S.'s $700billion bailout, except that Ireland's population hovers at 4.4 million, according to the World Bank; the bailout so far equals 30percent of the country's €158billion gross domestic product. EU officials say Ireland's emergency aid package could be worth $136billion (€100billion), roughly the same amount given to Greece last May.

While the U.S. economy was driven off a cliff by the reckless securitizing of subprime mortgages and Greece collapsed under the burden of misrepresented government spending, the Irish traveled a simpler road to ruin: by taking out enormous, unregulated loans. Ireland's economy has contracted for three consecutive years, and the Irish Central Bank governor has declared his country's fiscal deterioration "worse than almost any other country." In mid-November the yield on 10-year Irish bonds almost reached 9percent, compared with 11percent for Greece.

There were hardly any critics of the Celtic Tiger from 1995 to 2007, when GDP growth averaged 5percent to 10percent and pushed Ireland into the ranks of the world's leading economies. Now seemingly everyone in Ireland recalls a symbolic moment when they realized things had gone too far. For David Byrne, a repossessed-car auctioneer, it was the sight of his fellow countrymen swilling expensive wine. For Simon Ensor, a real estate agent, it was the day the owners of a 1,000-square-foot Dublin carriage house insisted on selling it for €2.5million, as opposed to the agent's suggested €2million—and then the house went for €3million at auction. For many, it was the day the Savoy Hotel in London was bought by Irish property developer Derek Quinlan in a celebrated expression of reverse imperialism.

Today, according to former Central Bank of Ireland economist David McWilliams, the average Irish family owes €132,000 to the banks. Ireland's Economic and Social Research Institute estimates that housing prices have fallen 36percent since their peak in 2006. Unemployment has increased from 4percent during the boom years to 14percent. Many Irish people won't be able to pay off their debts in their lifetime, and almost all the commercial developers are broke. The nation once described by New York Times columnist Thomas L. Friedman as the second-richest country in Europe has become the country with Europe's largest deficit.

More poignantly, a people who fought against the British Empire for their sovereignty may lose control of their financial future. Brian Lucey, an economist at Trinity College Dublin, says the government miscalculated the crisis' size. "The banks destabilized the sovereign, and the sovereign has destabilized the euro zone," Lucey says. "The banks are totally dependent on the European Central Bank for existence." Of a potential bailout, he adds: "We won't have much of a choice."

Wasteland Tour

Inside an old black Land Rover bursting with pens and wrappers and trash, Simon Kelly conducts a wasteland tour of the Dublin boom years. "We built this thing ourselves," Kelly says as he passes glittering glass buildings. "We were trading with ourselves. And everything was being funded by the Germans through the European Central Bank. So nothing's really changed, if you think about it. We're still being funded by the Germans through the European Central Bank."

According to the Irish Property Council, as many as 29 Irishmen involved in real estate—from property barons to construction workers—have committed suicide since the crash began. The Kellys have steeled themselves against the pain caused by the financial collapse in a uniquely Kelly way: by leaning into it. Paddy was the first of the go-go developers to admit in court, in 2009, that "my liabilities exceed my assets." On Oct.28, Simon published a book about his misadventures in finance called Breakfast with Anglo.

Simon spends much of his time helping NAMA manage his properties, now estimated to be worth €700million, down from a high of €2.8billion, and flying to England every four months for a business course on corporate responsibility and sustainability. He hopes someday to create a company that produces something other than glass and steel. "Half of the developers have gone bonkers, half left the country," Kelly says. "Most of the men are 65 years old, so they don't need a new life. I'm 38 years old and have five kids."

"My wife thought we were all nuts," he adds. "She was from a farming family. 'Why do you want all this money?' she would ask."

Two neighborhoods on Kelly's tour best represent the bubble that overwhelmed Ireland. The Docklands, a stretch along both sides of the River Liffey that was once the dodgiest part of town, now has gleaming office buildings, apartment complexes, theaters, and convention centers. It's also where the empty shell of Anglo Irish's new headquarters sits and inoperative cranes loom like morbid giraffes. At night, the lit-up glass offices, the Samuel Beckett Bridge designed by Santiago Calatrava, and the neon rings of Convention Centre Dublin all look like a futuristic project from an architect's computerized modeling system.

Ballsbridge is the home of Shrewsbury Road, the poshest street in Dublin, where 6,000-square-foot homes once sold for €55million. The neighborhood also yielded one of the crash's few success stories: the sale of the Jurys hotel in 2005, a bonanza for the property's owner, hotelier John Gallagher. The site consisted of about five acres, and developers were said to be considering bidding €60million to €70million an acre, the same price that Chelsea Barracks, the most desirable real estate in London, was going for at the time. Few seemed to notice that while the bidders for Chelsea Barracks included a Qatari real estate investment firm and an American private equity fund, the bidders for Irish properties were almost always Irish.

Driving past Jurys—a five-story brick behemoth rising over lovely, leafy streets—Kelly talks about the bidding war with nostalgia. "It was as if the person who bid the highest was a genius," he says. The Kellys offered €273million, but Jurys, along with an adjacent site, sold to a developer named Sean Dunne for €380million. Dunne was celebrated for a time as the "Baron of Ballsbridge" in the press. He's now said to be broke and living in Connecticut. Gallagher, meanwhile, sold much of his hotel chain and escaped the crash with a €1.1billion profit.

Kelly calls the episode "my awakening moment." "I would look at the Americans, look at Apple (AAPL) and Microsoft, and think they're brilliant, because they produce all this stuff," he says. "And we produce … we buy buildings. We buy products in Germany and turn them into buildings."

Land Boom

The Irish were long dispossessed of land by an Anglo Protestant ruling class. Simon Kelly's great-great grandfather went to prison in 1882 for promoting land reform during a period known as the Land War. Simon's grandfather was a builder and refurbished elite Georgian houses. For the Kellys, the ultimate goal in life was to become landlords—"You'll never go hungry if you have a piece of land" was common wisdom for a generation. Paddy and his seven brothers did well building houses in the 1960s and '70s. Then he went bust for the first time during the '70s oil crisis, and like many Irish builders, Paddy moved to England during Ireland's miserable recession in the 1980s, where he enjoyed an affluent life in Mayfair. By this time, Simon, the oldest of four children, had demonstrated a knack with spreadsheets and gotten involved in the business. When the economy collapsed in the late 1980s, Paddy went broke again and came home.

This time, a new opportunity awaited him. In the late '80s and early '90s, American corporations such as Intel (INTC), Microsoft (MSFT), and Dell (DELL) arrived in Ireland to take advantage of the country's educated, English-speaking workforce and 12.5percent corporate tax rate. (Multinationals account for about a fifth of Ireland's GDP.) The foreign companies required buildings and helped start the boom that got the Kellys back on their feet. Simon calls the early '90s their "honest endeavor phase." More and more "builders"—men who didn't go to school, calculated sums on the backs of envelopes, and adopted the American term "developers" only a decade ago—became rich. Soon they would also become national heroes.

The other beast born in the late 1980s was Sean FitzPatrick's Anglo Irish Bank, which, being a smaller bank amid old standbys like Allied Irish Bank and the Bank of Ireland, needed to distinguish itself. FitzPatrick was ambitious, and Anglo began to aggressively offer loans for property development. "We'd have a lovely breakfast at 7 in the morning at the Shelbourne, and I'd say to my lender, 'I need some money,' " Simon recalls, "and he'd give me 10million quid. Just like that. I could have gamed the whole system if I wanted. There was no amount of money I wouldn't have been lent."

Simon's memoir details endless deals and speculations—acres bought, developed, or flipped. The Kellys couldn't keep track of them all: a ski resort in Italy, a hotel in Malta, the waterfront in Sarasota, Fla. "In the end, I found it vulgar," he says. "It became like Wall Street."

The actual boom ended in 2001, when productivity growth fell to 5percent. After that the Fianna Fáil government, which has led Ireland throughout boom and bust, failed to spur growth but kept credit flowing easily. "After 2001, we went into this credit-fueled boom," says Brian Lucey. "Although people conflate the booms, one was based on exports and competitiveness, and the other was a decision to keep that going by pouring credit into the markets and not regulating the financial-services industry."

Soon, everyone joined the party. Newspapers published real estate sections 50 pages thick. Developers began to travel by helicopter, the black birds frequently crossing the Dublin sky. Men went to Antwerp for bachelor parties. Ireland's GDP, which had been $25billion in the 1980s, soared to $267billion in 2008. The Irish could suddenly boast to the British that "our GDP is bigger than yours." Even more meaningfully, a country that had seen large numbers of its citizens leave for America, Australia, and England now had close to zero unemployment. Even today, the Irish speak of those years with self-deprecating affection. "Getting a mortgage was really like queuing up for cupcakes," says Byrne, the car auctioneer. "Ordinary people were telling their neighbor they're buying a three-bedroom with a private pool in Spain! Ordinary people!"

The Irish banks that made all those second houses possible were not investment banks or hedge funds but traditional banks, which found themselves suddenly flooded with cheap credit. "There was a lot of money sloshing around," says Lucey. "Plus, there were historically low interest rates in the euro zone."

FitzPatrick was an early adopter, aggressively loosening loan restrictions at Anglo Irish. Other banks implemented the same strategy to keep up. Financier Niall McFadden told the Sunday Business Post that one bank had accepted a personal guarantee for a €6.3million loan without ever bothering to meet with him.

"They did it because they could, because the regulator was nonexistent and the government was perfectly happy to engage in bubble financing of the public sector," says Lucey. "When the bubbles went away, the whole thing fell apart."

The collapse of Lehman Brothers in 2008 accelerated Ireland's slide, as property prices continued a downward trend that had started in 2007. "As a small, open economy, Ireland was always going to be vulnerable to global swings," says Ray Kinsella, an economist at University College Dublin. "But this is predominantly a self-inflicted crisis."

On Sept.29, 2008, with the shares of financial institutions plummeting, the government declared it would guarantee the debts of the banks. The financial regulators—who hadn't regulated much of anything for the past decade—didn't realize the extent of those debts, and bankers didn't help illuminate the scale of the crisis. A few days after the guarantee, FitzPatrick appeared on a popular radio program and declared that everything was fine: "The cause of our problems was global," he said, "so I can't say sorry with any degree of sincerity and decency, but I do say thank you."

Outcast Auditor

On Oct.6, something unusual happened to Eugene McErlean: The Central Bank of Ireland's new financial regulator, Matthew Elderfield, apologized to him.

McErlean, 52, had worked for five years as an auditor for Allied Irish Bank. In 2002 he prepared a report for the nation's then financial regulator making a case that his employer had overcharged on hourly rates for the amount of time that bank managers spent with customers. (The range of overcharges tallied some €88million.) The Central Bank decided against launching an investigation, and a year later McErlean was removed from his job.

"The banks believed their own publicity, that Irish banks were the best in the world. I had worked other places," he says over coffee in the lounge at Buswells Hotel. "And my job as auditor was to give an independent opinion."

In a rare admission, Elderfield apologized for how his office handled McErlean's case. "Some of the matters could have been handled better by the public authorities involved, and as a result of that I am sorry for any unintentional distress caused to Mr. McErlean," he said before Parliament.

Irish banks operated in a culture of deference and uniformity, and, due to the sharp increase in business and the arrival of a Wall Street culture of performance-based pay, bankers went from making €150,000 a year to millions. As Simon Kelly describes it, bankers also stopped paying attention to their loans. Ireland had 10 to 15 major property developers who could drive the market, and everyone wanted to loan money to them. McErlean says the regulator at the Central Bank, who got reports on this activity at least once a quarter, didn't pay close attention. "If normal checks and balances had been in place," he says, "none of this would have happened."

The Irish still don't really know what went on inside their banks. While at least one banker, FitzPatrick, has been arrested (and released) for fraud, Shane Ross, a senator and author of two best-selling financial books, says criminal activity wasn't the cause of the crash. "It was a simple circle of being interdependent on each other," he says, referring to the politicians, developers, regulators, and bankers. "The country would have gone bankrupt without spectaculars like Sean FitzPatrick."

Few whistleblowers or truth-tellers have emerged as heroes in Ireland. David McWilliams and an economist named Morgan Kelly, Ireland's Dr. Doom, were mocked during the bubble years when they predicted a downturn in the country's fortunes. Bertie Ahern, Ireland's

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