fast in GIPS, but exhibited some important differences. In 2007/08, domestic credit to the private sector accounted for around 200% of GDP in Ireland and Spain, and almost 170% in Portugal. Greece, less financially developed than the others, is an outlier as this ratio was _under_ 100% of GDP. However, Greece is not an outlier in terms of the _rate of increase_ in the credit to GDP ratio; this ratio doubled for Greece, Ireland and Spain during 2000‐2007. In this case, Portugal is the “outlier”, as its credit growth was substantially slower as shown in Figure 3 below, though it started at a much higher ratio.<sup>7</sup> Portugal’s was a slow brewing crisis. High credit growth meant fast‐rising private debt‐GDP ratios. When the global financial crisis struck and GDP fell, debt ratios accordingly jumped.

_<u>The public sector boom: a spending spree by government and rising public indebtedness.</u>_ Governments (to varying degrees) were also spending, though large differences are visible in the budget positions of Ireland and Spain on the one hand, and Greece and Portugal on the other. In 2007, Greece and Portugal had budget deficits of 6.7% and 3% while Ireland and Spain had budget _surpluses_ of 0.3% and 2%, respectively. However, a warning bell in Ireland’s case was that _real government expenditures grew 80%_ (11 pp of GDP) between 2000 and 2008, compared with 40% for GS and less than half of that for Portugal (the non‐boom country).<sup>8</sup> Greece and Ireland, the first two to enter IMF/ECB/EC programs had continually _deteriorating_ budget positions, (11 and 5 pp of GDP respectively), Portugal’s attempts at budget control were intermittent, but Spain is distinguished by rising surpluses.

**Figure 3: Private debt to GDP (%)**

**Figure 4: Public debt to GDP (%)**

<!-- Start of picture text --> 300 200<br>250<br>150<br>200<br>150 100<br>100<br>50<br>50<br>0 0<br>2000 2002 2004 2006 2008 2010 2012 2014 2000 2002 2004 2006 2008 2010 2012 2014<br>Greece Ireland Portugal Greece Ireland Portugal<br>Spain EA‐19 EU‐28 Spain EA‐19 EU‐28<br>Consolidated debt covering debt securities and Consolidated debt covering gross general government debt.<br>loans of non‐financial corporations and households. EA‐19 and EU‐28 are simple averages.<br>EA‐19 and EU‐28 are simple averages. Source: Eurostat.<br><!-- End of picture text --> Consolidated debt covering debt securities and loans of non‐financial corporations and households. EA‐19 and EU‐28 are simple averages. Source: Eurostat.

Cyclically adjusted deficits show a similar pattern. _However_ , estimates of revenue were biased upwards because the cyclical component of asset booms, particularly housing booms, was not accounted for in the estimates, meaning that the structural deficits were underestimated. Ireland and Spain’s rising tax revenues, overestimation of potential output, and underestimation of the structural deficit, covered the fact that fiscal positions were changing. Kanda (2010) finds that in Ireland, with house prices soaring, stamp duty, capital taxes and VAT on property grew well above GDP growth. After accounting for these factors, he finds an almost 4pp reduction in structural revenues between 2000‐08; thus in reality, the structural primary deficit rose to over 10% of GDP in 2008, but was hidden by property revenues.<sup>9</sup> Consistently high deficits meant public sector debt to GDP was the highest in Greece by far on the eve of

> 7 The numbers are even higher if total credit from all sources is considered: during the years 2002‐2008, credit from all sources to the private sector increased 163%, 189%, 60% and 133% respectively in Greece, Ireland, Portugal and Spain.

> 8 At the same time, the number of public servants increased 35%, and wages rose 60% during 2000‐08 in Ireland. Relative to GDP, government size grew much less in the other countries, the next highest being 4.5pp in Greece.

> 9 See also Eschenbach and Schuknecht (2002), Girouard and Price (2004) and Morris and Schuknecht (2007) for more on biases in estimation of structural fiscal deficit without accounting for asset price bubbles.

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