Ireland’s difficulties arose because of a vast property boom financed by cheap credit from Irish banks. Ireland’s three main banks built up 2.5 times the country’s G.D.P. in loans and investments by 2008; these are big banks (relative to the economy) that pushed the frontier in terms of reckless lending.
The banks got the upside, and then came the global crash in fall 2008: Property prices fell over 50 percent, construction and development stopped, and people started defaulting on loans. Today roughly one-third of the loans on the balance sheets of banks are non-performing or “under surveillance”; that’s an astonishing 80 percent of gross domestic product, in terms of potentially bad debts.
The government responded to this with what are now regarded — rather disconcertingly — as “standard” policies.
They guaranteed all the liabilities of banks and then began injecting government funds. The government is now starting a new phase: It is planning to buy the most worthless assets from banks and give them government bonds in return. Ministers have also promised to recapitalize banks that need more capital.
The ultimate result of this exercise is obvious: One way or another, the government will have converted the liabilities of private banks into debts of the sovereign (i.e., Irish taxpayers).