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Is Ireland the next big bomb in the global debt crisis?

February 16, 2009 |  3:44 pm

Ireland's main stock index dived 4% today, the fifth straight decline, after European media reports over the weekend focused on the possibility of the once-booming Emerald Isle reneging on its debt.

"Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about its troubled banking sector," Britain’s Sunday Times reported.

In the credit-default-swap market, the cost to insure $10 million in Irish sovereign debt against default jumped to $377,000 on Friday, up from $262,000 at the end of January and just $24,000 a year ago, MarketWatch.com reported.

Bankofireland The Times noted that pledges made by Ireland to support its crumbled banking sector amount to 220% of the country’s annual economic output. Loans outstanding at Irish banks are more than 11 times the size of the economy.

Ireland still has a "Aaa" credit rating from Moody’s Investors Service, but the rating was placed on "negative outlook" last month, meaning it’s at risk of a downgrade.

Across the North Atlantic, tiny Iceland already is a financial basket case. But the rest of Europe has much more at stake in Ireland, because the latter is a member of the European Union and one of 16 countries that use the euro currency.

Ireland’s euro-zone membership means the country’s problems also become the problems of the European Central Bank. That's a good thing, or a bad thing, depending on where you sit in Europe.

From MarketWatch.com:

Ireland differs from Iceland in one important respect, said Nick Stamenkovic, fixed-income economist at RIA Capital in Edinburgh: "Ireland has recourse to the European Central Bank and a lot of funds," he said.

Iceland didn’t. As a result, comparisons between Ireland and Iceland are "overdone," he said.

Of course, there is the matter of the so-called no-bailout clause of the Maastricht Treaty, the agreement that established European economic and monetary union. The clause ostensibly prohibits fellow euro members from coming to the rescue of a member state in risk of default.

But the threat of a default would likely force fellow members to come to Ireland's aid "to keep the currency intact," Stamenkovic said.

Economist John McHale, writing on the Irish Economy blog, asserts that Ireland is "well removed from a full-blown financial crisis," despite what the credit-default-swap market is implying.

-- Tom Petruno

Photo: The Bank of Ireland's offices in Dublin. Credit: Crispin Rodwell / Bloomberg News

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