Ireland - unravelled by bankers
In the case of Ireland there were two stages.
First the Irish authorities allowed their banks to recklessly expand. This began in 2003, was aided and abetted by inappropriately low interest rates (set by the ECB), and once the party got going everyone wanted to play, and not just in Ireland as many overseas banks joined in the fun.
The second stage flowed from the fact that the debts of the Irish banking system had become vast relative to the size of the Irish economy. As the Irish economy went into a debt-fuelled tailspin, the Irish government, rather stupidly, decided to guarantee the liabilities of their banks (which were to a large extent bonds issued to German, French, and British banks, who had supported the madness of Irish bankers). If those bonds couldn’t be repaid these overseas banks would take a big hit.
You (and we) may think that those banks made a business decision to lend to Ireland, so if it went sour they should take the loss. But the Irish government decided (perhaps under pressure from the European authorities) to take on these responsibilities – this meant the cost of the bad Irish banks fell on Irish taxpayers (who had nothing to do with this).
As a result of that government action, Ireland is bankrupt. As one commentator put it:
“20 years ago Ireland showed how a small country could drag itself out of poverty through the energy and hard work of its inhabitants, but has since fallen among thieves and their political fixers”
Spain had similar problems in terms of a property bubble bursting, though their government wasn’t as daft as to guarantee all the banks’ liabilities.
Whereas Europe can cope with an Irish default, and Ireland is otherwise structurally sound, Spain is actually the greatest concern because of its size.
We need to keep a very close eye on Spain.
(Taken from TopFunds Guide July 2011)