Just a general question and not related in anyway to what is happening in the world economy at this moment. But what effect would a default have on a country like Ireland?
This all depends on how the defult happens. Ideally Ireland would talk to bond holders and explain the situation and come to an agreement. This is what private citizens are being advised to do when they have trouble with debts, and is the right advice for a state as well.
If, on the other hand, things turned out Greek, head in the sand style then the default would be very chaotic.
This recent article sheds some light on what could happen in Greece and draws comparisons to Argentina's default:
What would happen to our membership in the euro?
I have heard conflicting reports on whether it is possible for a member to be kicked out of the euro. I haven't looked at the legal documents signed by member states, as I have made provisions for an Irish default regardless of what happens currency wise.
Many articles have been written about this subject, here is just one:
http://www.foreignpolicy.com/articles/2010/03/23/could_greece_get_kicked_out_of_the_european_union
What would happen to deposits held?
If Ireland were to default it would certainly not be able to live up to any deposit guarantees. This would make it very difficult for Irish banks to get funds on the money markets and would likely result in bankruptcies, with risks to deposits.
What effect would there be on inflation/deflation?
I assume you mean the overall price level of goods. Inflation is always a monetary phenomenon, i.e. it is the increase of the money supply through credit expansion and printing of new money. Higher prices are merely the consequence/symptom of inflation.
At the moment, with the euro, the newly printed money has been largely offset by credit contraction (through debt defaults). The newly created money is being used by banks to fix their balance sheets, but as soon as they start lending out the excess reserves held, we will see huge increases in prices.
If Ireland default and stay in the euro, then we would probably initially see more credit contraction as banks go out of business. These would be replaced by new or foreign banks and credit would quickly start flowing again.
If Ireland defaults and leaves the euro, I see a whole different picture. The replacement currency would be hugely devalued and the money supply would be inflated to "stimulate" the economy. This would result in higher prices of all consumer and capital goods.
Basically, I see no way that we will avoid much higher prices, as politicians have proven that they will do anything to stop the corrective actions of a recession.