The problem for Ireland is that it is caught in a vicious cycle where debt is so high that the government must reduce spending which in turn reduces growth. Without strong economic growth the country has no chance of escaping the debt trap The country is locked in the Euro, so it cannot enjoy the benefits of a weak currency. Ireland is also rapidly facing the endgame of a debt fueled property bubble economic ruin. The game is similar to Greece. As long as Ireland can borrow at 4-5%, it will be fine, but as the debts rise and the economy remains stagnant, investors start to naturally worry about the country's ability to honor its debts. This leads to an increase in CDS as investors scramble to buy protection on their Irish bonds. Simultaneously, the bond market starts to demand an increased risk premium (currently 7.2%) which raises Ireland's cost of servicing its debt. The increase in debt costs disturb investors, which leads to a further increase in bond yields (like 10%). At this point, mass fear hits the market as everyone wakes up the reality that Ireland cannot pay back its debts without consistently borrowing more money. Once this event runs its course, Ireland can no longer issue debt in the capital markets and suffers its first failed bond auction. The failed auction might not happen because the ECB might decide to buy the whole debt issue (as a stop-gap measure), but this scenario would lead to the same result---an EU bailout.
Ireland will be publicly humiliated by having to go to the EU Commission and seeking financial assistance similar to Greece. No doubt, the EU will oblige (after all the ECB is printing the money) but will implement draconian conditions to punish Ireland for its recklessness. This bailout will temporarily halt the panic in the Irish markets and give them some breathing room. However, the EU bailout will do nothing to solve the problem of Ireland's massive and unsustainable debt burden. The final chapter of this crisis is a mandatory debt restructuring where the bond holders of Irish (and Irish bank debt) take a large haircut (30-40%). In return, they will get a slightly higher interest rate and perhaps an extension to their bond maturities. While this may sound like a bad outcome for Ireland, a debt restructuring is what will ultimately provide the foundation for future economic growth.
Black Swan Insights