Photo: Wikimedia Commons
Ireland has gone from being just a regular, worrying member of the PIIGS to an equal with Greece within months.The costs of the country’s recession, coupled with an austerity budget, an expanding banking sector bailout, and an inflexible exchange rate have left it on the brink of tapping ECB support.
But how did Ireland get here? And what options does it have for revival.
Like many countries in Europe, Ireland experienced a property bubble in lock step with the U.S. experience.
Brought on by lax lending standards and overly ambitious developers, it all eventually came crashing down as the global recession took hold.
Banks that were left holding the debts of property developers suddenly had massive toxic assets on their balance sheets.
With no way to sell the developments, or the already completed homes, banks were unable to lend, to worried about the losses they had already incurred.
The Irish government, knowing that banks would default potentially taking consumer accounts with them, stepped in to back stop the banking system.
The government promised support and created the National Asset Management Agency to buy up many of the bad loans.
Of all the Irish banks receiving government aid, Anglo Irish Bank is in the worst shape.
The bank has been split in two by the Irish government, in an effort to create a bad and good bank.
The costs of Anglo Irish Bank's bailout may rise above the €50 billion the government suggests will be sufficient.
Ireland is trying to grow its export sector as a solution to declining spending on property development (all but dead) and government spending (being trimmed by austerity).
The growth of an export sector relies on the economy becoming more competitive vis-a-vis rivals.
Ireland goods sell on the global market in euros. The euro is in a strong position, reacting more to the strength of the French and German economies than the weakness of the fringe.
So Ireland is left with the cuts that are meant to stimulate the private sector, and none of the benefits.
But even as the government has been cutting spending, Ireland has been increasing its bailout of Anglo Irish Bank.
One economist, Morgan Kelly, sees the banking sector bailout, led by Anglo Irish, rising another €20 billion to €70 billion euros.
That means the new cuts the Irish government has put in place, worth €15 billion over four years, won't even cover the growth of the banking sector bailout.
Ireland can choose more austerity and cut the government's budget further.
This will lead to declining tax revenues, due to more government employees being unemployed. And it may not make the country's private sector any more competitive, due to the static euro.
Ireland could put the burden of the banking sector bailout back on bondholders, and cut its losses with the sector.
Ireland is preparing to cut out the tier two bondholders in Anglo Irish Bank, paying them out at 20% the bond's worth.
But this may only be the beginning, as the costs swell for the Irish state.
Ireland could leave the euro. This would have obvious efficiency damages with the broader European economy, but estimates of those costs are not available.
But Britain has thus far been a good example of an economy that has made serious austerity cuts and seen the value of the pound, compared to the euro and other global economies, provide it an advantage in global markets.