ouch, this is going to hurt

The cost of saving the debt-ridden Irish banks is huge. Estimates say it is around $80 billion. The Irish banks though guaranteed, indeed part-owned, by the state faced a steady loss of deposits. Investors were taking their money home. So the banks became increasingly dependent on support from the European Central Bank.

Two down – Greece and Ireland – how many to go?

Ireland must accept a European bail-out. However, he EU and the European Central Bank are not negotiating to save Ireland, they are negotiating to save themselves.

If the Irish Republic cannot repay its debts, it will be its creditors in Britain, Germany and other larger nations that lose. And if Dublin defaults, the next domino to fall could be Portugal with the risk that Spain becomes the next target.

Ireland has conceded for the first time that it could not tackle its ailing banking system without international help. This helps secure government debts, which have rocketed since the government agreed to underwrite the country's five main banks.the rationale was that this was to prevent a collapse in confidence and a devastating bank run.

Without it Ireland's cost of borrowing in the market would rise to unsustainably high levels.

The IMF calls it 'tough love' in crisis situations. The Irish economy has already shrunk by nearly 20% since 2007, and taking even more demand out of the economy through tax increases and spending cuts would simply extend the downturn to perhaps six years.

Eventually the Irish are going to have enough of austerity's tough love to deflate their economy to drive costs down.

It was the decision by Brian Cowen, the Fianna Fail prime minister, on September 30th 2008, to provide blanket guarantee of all their deposits and most of the bank debts in Ireland. Though some sort of guarantee was necessary to stem a run on deposits and to prevent a collapse in the banking system and the economy, the guarantee need not have been quite so broad.

The banking sectors' collapse is the heart of the problem. Irish banks borrowed gaily in the international wholesale markets to finance a property development bubble that at its peak amounted to more than one-fifth of the country’s economic output. After the bubble burst the Irish banks relied on funds from the European Central Bank (ECB) to ensure their liquidity, but it was not sustainable. The Irish state had to do something to restore confidence in its banking sector.

The guarantee limited the state’s ability to force losses on the banks’ bondholders and left the public finances in ruins. The state has incurred a bill that has now reached almost a third of GDP. So the banking crisis has merged into the sovereign fiscal crisis.

That means tackling the deficit with austerity measures, which in turn means depressed wages and higher taxes. As a member of the euro, Ireland cannot devalue its currency. So wages have to come down to regain cost competitiveness.

So there will be little improvement in average living standards for quite some time.

the big fear is contagion---the Irish banking system triggering sovereign debt problems to other peripheral eurozone members.

Portugal would be the next domino to fall but the real concern is Spain, which, like Ireland, is suffering the after-effects of a bubble in its housing market. Spain has 20% unemployment, rising to 40% for young workers, and is ripe for a fresh downturn.

Ireland's sovereign debt crisis is now causing a political crisis for the Fianna Fail-Green coalition government that survives on a wafer thin majority.

The Irish sovereignty debt crisis is the flash point in the ongoing global financial crisis. The European banking system is already in a fragile state and will have difficulty coping with a series of sovereign defaults.The German banks may need to be bailed out because of their heavy debts incurred from going wild---lending to all and sundry without due diligence.

The most likely trigger for sovereign defaults in the next few years is a prolonged period of slow growth

the problem that arises with free market economics is that it holds that the market economy should be left alone as much as possible, and that it is good that governments do that.

The problem here is that for this type of economics bubbles simply did not exist – which meant that actual bubbles are, and were, allowed to grow; and that governments do not need to adopt policies to counter them.

What happened is the governments in the US and Ireland allowed the financial market to spin wildly until it broke down. Now these countries run the risk of years of economic malaise. The next decade will, in all probability, be the 'lost decade' .