Ireland, a warning for Belgium

The Sunday Times writes thatIreland could default on its debt. Once called the Celtic Tiger, Ireland now faces mounting problems, on the back of banking problems.

The cost of buying insurance against Irish government bonds rose to 350bp. It has almost tripled in a week. Simon Johnson, the former chief economist of the International Monetary Fund, called for this weekend’s meeting of G7 finance ministers to put Ireland’s troubles at the top of the agenda.

Pledges made by Ireland to support its banking sector amount to 220% of the country’s annual economic output. The total loans held in Irish banks are more than 11 times the size of the economy.

Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems that could ultimately fall to the state to resolve.

With Ireland set to borrow an additional €15 billion (£13.4 billion) this year, the national debt pile will hit €70 billion.

The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every £100 of debt it would cost £3.50 to insure against default. A year ago it would have cost 10p to insure every £100 of Irish debt.

One possible solution would seeGermany buy billions of euros of Irish government debt through a fund set up by the European Central Bank, thus circumventing no bail out clause among EMU members that prohibits direct government credit provision by ECB or national central banks. EU institutions and governmens can provide assistance if they can convince their citizens.

There are other ways to escape from default: 1)ask IMF help;2)ask banks to buy your government debt;3)sell external assets.

But none of these options seem realistic in the Irish case. For option 1 : it could help, but the IMF's bailout fund has only $200bn left.

The coclusion is that government are reaching their limits in what they can suppport in terms of bailouts. The situation can run quickly out of control, as once healthy Ireland is demonstrating.