So soon after Greece's economic crisis erupted earlier this year, one cannot but help getting a déjà vu. Markets have begun to ask questions about Ireland's solvency, but European policymakers appear to be in the same sort of denial as were their Greek counterparts. This denial may be the prelude to the same sort of grave policy mistakes that characterised last May's Greek bail-out package from the International Monetary Fund and European Union.
Until very recently, markets turned a blind eye to Ireland's highly compromised public finances and to the massive potential cost to the Irish exchequer of its blanket bank-guarantee programme. But since August 2010, there has been an abrupt turnround in market sentiment--triggered by a further downgrading of Ireland by Standard and Poors.
The market was particularly taken aback by S&P's estimate that Ireland's bank-guarantee programme could, in the end, cost the Irish government between a staggering 50 and 58 per cent of Ireland's gross domestic product--which could raise the country's public debt level to a level not very different from that now prevailing in Greece. . . .
Desmond Lachman is a resident fellow at AEI.