Ireland slips back into the dark Eighties

Ireland edged closer to default yesterday as its Government said the already crippling cost of rescuing its banking system had risen to almost €50 billion ($93 billion).

The latest bank bailouts mean that Ireland's budget deficit will explode from 11 per cent to 32 per cent of its national income this year - three times that of the UK, some 10 times the European Union's guideline, and the highest among the world's developed economies.

The announcement by the Finance Minister, Brian Lenihan, that Ireland's financial woes were even worse than thought has reignited fears of a repeat of May's "contagion", when the financial crisis in Greece spread to the vulnerable economies of Spain, Portugal, Italy and Ireland, sending the cost of borrowing in those nations spiralling.

Then, as now, investors are assessing the growing risk that a eurozone member will default on its debts - a calamity for the EU.

Lenihan had to spend half an hour on the phone to fellow European finance ministers trying to reassure them that Ireland will not have to seek external help, saying the nation is "fully funded".

Ireland's total national debt is almost 100 per cent of GDP, compared to 55 per cent in Britain, and at a level many economists regard as unsustainable.

Moody's, the last credit rating agency to give Spain a top AAA credit rating, downgraded Madrid's debts to AA, a move that underlined the fragility of the recovery across the eurozone's peripheral economies.

A Spanish general strike on Thursday and continent-wide protests also demonstrated how difficult it may be for governments to push through austerity packages.

The danger being identified by investors is that successive rounds of cuts in public spending and tax hikes only serve to weaken economies, push budget deficits higher and weaken banks still further as dole queues lengthen, house prices collapse and bad debts mount.

If the next round of austerity cuts promised by Brian Cowen's Government does fail, then Ireland would have no alternative but to approach the EU and IMF for a bailout, an indignity so far only suffered by Greece, which has drawn €110 billion from the joint EU/IMF fund.

That would also infect the standing of the EU more generally, and leave Ireland permanently worse off as its financial reputation suffers.

From being in the position of enjoying one of the highest living standards in Europe, Ireland might slip back into the kind of deprivation and emigration that characterised life before the 1990s.

While the very integrity and future of the single currency is not in the same sort of jeopardy as it seemed earlier this year, the news from Ireland and Spain helped push the euro down on the foreign exchanges, and shares in the Irish banks tanked.

A vicious deflationary cycle appears perilously close in Ireland, which posted a 1.2 per cent contraction in its economy in the second quarter.

Public sector workers are facing cuts in salaries of between 5 and 15 per cent, and thousands face the sack.

Investors are demanding record-breaking interest for lending to the Irish Government; it costs Dublin almost 7 per cent in interest to tempt buyers to take on a 10-year government bond, against about 3 per cent for an equivalent German government bond, though both are in euros.

The immediate cause of the latest crisis to hit the former "Celtic Tiger" stems from the appalling cost of keeping its banks afloat, and in particular Anglo Irish Bank.

Lenihan said the bill for recapitalising that institution alone had risen to about €40 billion, much worse than had been feared.

As with the rest of Ireland's banks, but in a more extreme fashion, Anglo Irish both relied too heavily on wholesale international money markets - which dried up during the credit crunch - and lent too readily into the property market. An official investigation into Anglo Irish bank by PricewaterhouseCoopers revealed it had 15 customers who owe the bank more than €500 million each, money that will never be recovered.

Ireland's dramatic decline from boom to near-bust has left some of its population with a reasonable standard of living but others in deep financial trouble.

One of the crucial factors is, of course, hanging on to a job. One professional said he had taken a pay cut, an experience which he described as "not pleasant but not a major pain".

But a cabinet-maker, John Noonan from Dublin, who has been out of work for years, and has a wife and three children, said glumly: "It's pretty hard with the cuts; they keep cutting the dole money. Children's allowance has been cut too, and child benefit has gone completely."

Noonan is just one of 466,000 unemployed people who throng the labour exchanges: queues regularly snake around the block.

Irish unemployment, at more than 13 per cent, is exceeded within the EU only by Spain and Slovakia.

House prices have slumped, often by more than 40 per cent, since the property bubble burst.

Some of those in the worst predicaments live in what are known as ghost estates, unfinished developments often on the outskirts of provincial towns.

There are 650 ghost estates, with a recent report concluding that 120,000 homes in them are unlikely ever to be sold.

- INDEPENDENT