Ireland financial crisisThe sleepy Greek economy had an uncanny ability to frighten investors over the summer. World markets quaked as highly unionized workers took to the streets in a show of force that ultimately turned deadly.

Panic-stricken commentators at home, meanwhile, said the Greek horror story would inevitably be repeated in the United States.

But the troubled Greek economy has stabilized with considerably less damage than doomsayers had feared. Ironically, the chaos still brewing in Ireland -- a liberalized, turbocharged economy that delivered spectacular growth over the last decade -- may pose a far larger systemic threat.

And as the European debt crisis reemerges, investors would be wise to focus on the different problems faced by troubled countries like Portugal, Ireland, Italy, Greece and Spain that were conveniently lumped together under the catchy PIIGS acronym.

Investors Nervous Despite Deal

Politicians on the continent put aside months of brinkmanship over the weekend as the situation became more serious. The contentious issue of Ireland's low corporate tax rates was cast aside and the country formally requested an aid package. An estimated 95 billion euros will be made available to Ireland. But stock markets sold off Monday and investors remain nervous.

Ireland may be far more difficult to stabilize than Greece, counter-intuitive as that might seem. Ireland, after all, was the seen as a sophisticated and booming economy while the Greece struggled with basics like tax collection. With a GDP per capita of about $60,000 by some measures, Ireland ranks as among the wealthiest members of the OECD, while Greece comes in at about only $32,000.

But as the credit fueled boom in the United States demonstrated, rampant growth can end with far more carnage than sustainable stagnation. Indeed, Ireland resembles Iceland -- another former European star that embraced free markets to boom and then bust -- more closely than Greece. Like Ireland, Iceland is a wealthy country and has a GDP per capita of about $52,000.

Iceland, of course, was among the countries most ravaged by the financial crisis. The country saw its banks nationalized, its stock market plummet, had to rely on a loan from the IMF and saw GDP contract by a gut wrenching 5.5% during the first half of 2009.

With a GDP of about $17 billion, the country is a fraction of the size of of the $268 billion Irish economy. While Ireland hardly faces the kind of nightmare that Iceland did, the experience is still useful in illustrating how destructive a major credit bust can be.

Another Real Estate and Banking Story

"In Iceland, an extraordinary credit boom took place after the country's banks were privatized in 2003 and were inadequately regulated," analysts at the consulting firm McKinsey wrote in a research report earlier this year. Total debt to GDP rose by more than 900% between 2000 and 2008 to reach an astounding 1,189% of GDP. Iceland's financial sector debt alone hit 580% of GDP.

"Ireland had a similar credit boom after 2001, when it actively sought to market itself as an international financial services hub," the analysts wrote. Total debt to GDP doubled between 2001 and 2009 to over 700%, with financial sector debt accounting for half of the total at 421%. Capital inflows fueled a real estate bubble, and real estate accounted for 61% of Ireland's outstanding domestic credit.

"As with Iceland, the intensification of the financial crisis in late 2008 caused asset prices to fall steeply and plunged the economy into deep recession," the analysts wrote.

Scrambling to prevent even more panic, Ireland guaranteed bank liabilities and put itself on the hook for the bad loans made by the financial sector.

But Ireland may enjoy an advantage thanks to the euro. While critics often point to a "euro straight-jacket" in tough times because the common currency minimized monetary adjustments, at least Ireland like Greece will be spared a devastating currency run like the Icelandic krona saw.

Riots and protests like those that swept across France last month get plenty of attention and can rattle markets. But investors should remember that it's ultimately easier to resolve crises that are more bark than bite.

The quiet crisis in Ireland, in other words, should be more worrisome than the chaos from Greece that flooded the airwaves over the summer.

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davidmhermes

It is becoming obvious that banks in the United States have to be nationalized. We cannot trust them to make prudent investment of their assets as they are motivated by greed. They know if they fail the Federal Government of the U.S. will bail them out so what do they have to "lose' by making risky investments like sub-prime mortgages which should not have been made in the first place? Slowly but surely European contries as nationalizing their banks. A bank is like the post office in the U.S. and should be controlled and administered by the U.S. Government.

November 26 2010 at 1:37 AM Report abuse rate up rate down Reply
Sonny

"How bad could Ireland Get?............HOW BAD COULD THE US GET??????????

November 24 2010 at 9:13 AM Report abuse rate up rate down Reply
Michael

Well, it seems Wall St. and the other big bankers are going to successfully remove alot more money from the common folk before the markets drop heavily. Everyone seems to forget that these bubbles, weather in real estate, commodities (like gold), or stocks, have been made by Wall St. and their banker buddies, and they are not buying, they are selling. Selling to the average hard working guy. Selling to the people you put in charge of your 401K. They are selling while the markets are high, and when it falls, you lose your ass. Actually you lose your money, retirement, maybe you house. They will do everything they can to artificially rally the markets. They have rallied them with not their own money, but with money belonging to tax payers, that they received from less than honest politicians in the form of bailouts. Wake up fast, markets can be manipulated, but only so long, then the correction is that much harder in the other direction. Do you want to have the FDIC trickle your money back at only a few hundred dollars a month on your deposits, once your bank fails, or worse if you have more than the gauranteed amount in your account, you have just lost the excess. The governments, via the FED, IMF, and others, are piling more debt upon debt, borrowing more to cover huge amounts that can't be paid, and are setting up the dominoes for economic colapse. Most will be severely affected, but if you take steps now you can minimize it's impact on you, and maybe even become rich. It's your choice.

November 24 2010 at 7:06 AM Report abuse rate up rate down Reply
tfrflorida

Listen only the big money wants you to belive the Ireland situation will cause a problem,,,,,Life will go on without them or the Greeks.... Forget the european situation, we can survive!

November 23 2010 at 11:00 PM Report abuse +1 rate up rate down Reply
speakenglish2010

looks to me, all you people had your head in the ground during 2008 elections, i saw this coming and prepared, doing fine ( dont mean to sound like that ), start paying attention and help remove and or stop obamas destruction of america or losing your house will be a very small part of a much bigger problem to come, dont act like you dont know, you can always replace your house later.

November 23 2010 at 8:16 PM Report abuse rate up rate down Reply
1 reply to speakenglish2010's comment
davidmhermes

When Obama took office from Bush the economy was already headed for the pits. The younger Bush, like the older, ran our economy into the ground and now we are trying to right it again. God save us from the Bush's and Reagans cause all they care about it making a buck not the welfard of the citizens of the U.S.

November 26 2010 at 1:41 AM Report abuse rate up rate down Reply
bansijeff

Ireland has 4 million people. It's GDP is 1% of the Eurozone GDP. Greece's GDP is about the same as Dallas-Ft. Worth. Iceland has 300,000 people & its GDP is less than the city I live in, Mountain View, CA. Get real people, this is a tempest in a teapot. It doesn't affect the fundamental issues of the European economy. Pessimism porn is driving the market.

November 23 2010 at 3:36 PM Report abuse +1 rate up rate down Reply
ebreit19

So? How should Ireland solve the problem? We can always reread or consider Swift's 1729 "A Modest Proposal for Preventing the Children of Poor People in Ireland Being a Burden to their Parents or Country and for Making them Beneficial to the Public." Arrrrr

November 23 2010 at 2:09 PM Report abuse rate up rate down Reply
donut999

probably bailer. the one in trouble would be the bailee???

November 23 2010 at 1:04 PM Report abuse rate up rate down Reply
donut999

so what happens when the rescuers run out of fuel? who is next to go, who is next to provide bail out. at some point, the bailee will be the last one standing. who rescues him?

November 23 2010 at 1:04 PM Report abuse rate up rate down Reply
donut999

loved the sat night live spoof of boehner, pelosi and rangel. too close to the truth. they all are mess, lie, and have only one ambition. re-election and control. it isn't about one party over the other. presented rangel as the lying rube he is. presented pelosi as ms ironpants and boehner (be careful how you say his name) as just a talking head that never answers a single question, just erupts in to party rhetoric. cut taxes, cut spending like the people said. but which ones, and how much, and how do you cut the deficit with tax reduction. back to party line the people sent a message.

November 23 2010 at 1:02 PM Report abuse rate up rate down Reply