What has happened to Ireland in recent weeks almost beggars belief. Almost, but not quite. After all, there are economists who have been predicting the inevitability of all of this since before the ill-fated ‘cheapest bank bailout in history’—the Irish government’s blanket guarantee of depositors and bond-holders back in 2008. The snowballing effect of steeper and steeper estimates for the total cost of this bailout freaked the bond markets (on whom countries rely for money they can’t raise in taxes) to such an extent that the return on a ten year Irish bond

reached almost 10 percent at one point. Ireland’s situation became untenable—high unemployment, dwindling tax base, huge deficits—and despite Taoiseach Brian Cowen’s protestations that the country was fully funded till mid 2011, Europe and the IMF stepped in and virtually compelled Ireland to accept a rescue plan. They did this because: a) Ireland was likely to need it at some point in the near future anyway, b) they wanted to avoid Ireland’s problems spreading disease-like to other weak Eurozone economies—notably Portugal, Spain and Italy—which would jeopardize the euro itself and the economies of the entire region and c) because they want the money they lent Ireland back.
Not many would have a problem with a) or b). But c) bears some further examination.
Bear with me. Ireland’s banking sector is insolvent, there is no way the country’s banks can ever repay what they owe. Just one of those banks, Anglo Irish, will by the government’s estimate of just a few weeks ago cost euro34 billion to save. To put the enormity of this into perspective that amount is roughly equivalent to the entire tax take of the Irish government for 2010. How we got to this point is for the economists and historians to sort out. Incredibly lax financial regulation, bad lending practices, greedy bankers aided and abetted by greedy politicians. It’s all out there and if you have a strong enough constitution you can google it and formulate your own opinion.
But back to c). Eupoean banks, pension funds, hedge funds, municipalities and the like all placed enormous bets on Ireland. Without this money it would have been impossible for the bankers, developers and politicians, however corrupt or inept they were, to get Ireland in the position it is in today. English banks for example, almost incredibly, are exposed to the Irish banking system to the tune of over $120 billion. The Germans and French have similar problems and others are worried to a lesser but still mind-boggling extent. All this money was flying around the Irish economy at historically low interest rates. Add to that the fact that multi-millionaire developers and first time homebuyers alike were able to get financing with little or no collateral and even less record checking. This was what caused the property bubble which has now destroyed the Irish economy.
The people who supplied the money were investing it in Ireland and investment implies risk. True, probably more risk than they might have known about but risk all the same. How close did these investors look into what was making Ireland tick? How much due diligence did they really do? They gambled on something that kept paying back, it seemed like a sure thing. If a developer walked into his local branch of Anglo Irish and asked for a euro100 million to build a 400 unit housing estate in Offaly, who was the bank manager to turn him down? He knew Anglo could float a bond for the money and someone in Germany or France would eagerly buy in. Wasn’t the development going to be worth euro200 million when it was finished anyway? And then it all collapsed, as all bubbles do. The problem here is that because of Brian Cowen’s bank guarantee, all those investors stand to get all their money back even though their investments didn’t work out. And the ordinary Irish men and women in the street will be paying for this for decades to come in higher taxes and lesser services. Unless, of course, the new government has enough spine to reverse this ludricous policy before it is too late. Yes, many of the bond-holders have already settled but there are many more out there. German Chancellor Angela Merkel has already supported this new direction by saying that bond-holders of all european sovereign debt should eat some of the losses.
Cowen’s rationale for the bank guarantee in the first place and right through to the current crisis has been that we must honor the bond-holders lest they become burned and unwilling to invest in Ireland in the future.
If Ireland chooses to stay the course and insist that everyone gets paid back in full, the probable outcome is decades of economic stagnation, mass emigration and social unrest. It might even go bankrupt anyway, such are the enormous liabilities. Who would want to invest in a country like that?
On the other hand, whoever takes over from Brian Cowen after the next election has a three year window of opportunity. That’s how long the European/IMF rescue deal allows Ireland to before it has to go back on the bond markets looking to borrow money. If it restructures its debt now (i.e. writes off some of the money it owes bond-holders) there is a reasonable chance it might emerge with a growing economy, a motivated workforce and an educated class that wants to stay put. Investors are forward thinking. They will invest where they see the potential for growth.