How did Ireland melt down so quickly?

One of the key factors was a U.S.-style, easy-money real estate bubble, in which banks provided
cheap credit to almost anyone who wanted to buy or build houses, dramatically hiking prices.
The boom lasted for more than a decade, but when the global recession hit in 2008, home prices
collapsed and people could not pay back their loans, imperilling the banks holding the debt. In
recent years, the government borrowed more and more money to fund budget deficits in a weak
economy. Institutions lending money to the Irish government (such as the British banks) charged
higher and higher rates because of worries over a possible default.

Wasn’t that sexy, ‘low-tax’ program supposed to help Ireland?

For several years, the low-tax environment did lure all kinds of companies to set up shop in
Ireland. But when the economy went sour, many of them left or cut back drastically, putting
people out of work and denting government revenue. Now, lenders are pressuring the
government to raise taxes so it can pay back the money it borrowed to maintain spending deficits
exacerbated by low tax revenue.

Why is this all happening now?

Essentially, it became clear that the Irish banks were in deep trouble, and the Irish government
was overextending itself to bail them out. While Ireland has been in bad shape for some time,
bondholders (institutions who had lent it money) got especially nervous when it looked like they
might have to accept some losses if the country’s loans were restructured. This pushed interest
costs for Ireland even higher, which also meant private companies had to pay exorbitant interest
rates to borrow money. The spiral could have gotten out of control and caused a deep recession if
the European Union, the International Monetary Fund and other countries didn’t step in.

How did this become an international problem?

Some of the money borrowed by the Irish government belongs to institutions in other countries –
such as Britain – so it is no surprise they’re worried about getting it back. The Irish banks
borrowed and lent money all over Europe, especially in Germany and Britain, so their troubles
can infect others. And because Ireland is part of the euro zone – the 16 countries that use the euro
– the other members are worried that Ireland’s woes could damage the currency and depress
financial markets even further. A collapse in Ireland would also have widespread psychological
implications beyond Europe – essentially, the whole world is watching to see if it can get back
on its feet.

So that’s what’s this contagion business is all about?

That’s it. When you share money, germs get passed around pretty easily, so it’s no surprise the
other countries that use the euro are worried about Ireland’s problems denting the value of the
currency. But more broadly, the financial world is all about confidence – mainly the confidence
that the money you’ve lent or invested will get paid back eventually. When banks – or worse,
countries – look like they may collapse, everyone worries and gets more tight-fisted. That can
push up borrowing costs and slow economic growth further.

Dare I ask, but isn’t Ireland’s economy insignificant?

Yes, it’s small, but any country’s financial failure is bad news. While Ireland makes up less than
2 per cent of the euro zone’s economy, and just a quarter of a per cent of the world’s gross
domestic product, its problems raise questions about the economic health of Europe overall, and
whether having a common currency is a good idea.

Why are people now worried about Portugal and Spain?

Both these countries have huge budget deficits, and they may need bailouts, too, if interest rates
on their borrowing continue to rise. Portugal is not huge, but Spain makes up about 13 per cent
of GDP in the euro zone, and any trouble it has would be much more serious. So far, both
countries say they have plans in place to cut their deficits and insist they do not need help.

How much money will Ireland get?

The bailout package is expected to be around €85-billion. That’s equivalent to about 60 per cent
of Ireland’s gross domestic product – the total value of all goods and services it produces in a
year. The bailout amounts to about €18,000 for each person in Ireland.

Who’s putting up the cash?

The money is coming from the European Financial Stability Facility – a fund set up by the
European Union – and the International Monetary Fund. The countries carrying the heaviest load
– France and Germany – will have to borrow money to come up with their share for the stability
facility.

Do they have to pay it back?

Yes. These are loans, so the money is supposed to be paid back … eventually. When the
structure of the bailout deal is set – and that hasn’t yet been finalized – there will likely be a
schedule and timetable for returning the funds. One thing you can be sure of, there will be a lot
less press coverage when the loans are repaid than there has been of the bailout itself.

How does this affect Irish politics?

Irish Prime Minister Brian Cowen said he will call an election as soon as he brings down a
budget – and his government will likely go down to defeat. That budget will be very unpopular,
as it will raise taxes, trim government services and cut public servants’ pay and pensions.
Already, there have been violent anti-government protests, as people express their displeasure at
having to face cuts while the banks are bailed out.

Does the Irish financial crisis affect Canada?

Not much, at least in the short term. We don’t even trade that much with Ireland – or with the
rest of Europe, for that matter. If Europe implodes, however, the world’s economy could hit the
skids, and that disaster that would hurt Canada’s commodity sectors, at the very least.