THE BLOG
05/31/2010 05:12 am ET Updated May 25, 2011

Ireland's Banking and Economic Crisis: Toxic Loans Surpass Estimate of Irish Government

Prior to Greece becoming the economic and financial basket case of Europe, it was Ireland that held that dubious distinction. For when the global economic and financial crisis detonated with full fury in the fall of 2008, Ireland's own version of the real estate asset bubble imploded, transforming the balance sheets of the nation's major banks into a toxic waste dump.

As with America and the UK, Irish politicians informed their nation's citizens that the big banks must not be allowed to fail, and therefore the taxpayers would pay for the egregious financial miscalculations of the high-priced "talent" that led these Irish financial institutions into the abyss. While the United States came up with its TARP taxpayers bailout, Ireland formulated its own unique response, the so-called NAMA, the acronym for National Asset Management Agency. NAMA was, in effect, a "bad bank," which would take the toxic assets off the balance sheets of Ireland's large banks, in particular the Anglo Irish bank, in return for sovereign bonds. The expectation was that Irish taxpayers would have to accept large losses, but in return the nation's banks would return to fiscal health, and be able to resume normal patterns of credit and loan creation.

The "bad bank" approach had many critics, appalled that taxpayers money was being used to backstop private sector losses, in exchange for vague promises by politicians that the end result would be therapeutic for the national economy's ills. No less an authority than Joseph Stiglitz, Nobel prize-winning economist, expressed great skepticism over the efficacy of Dublin's taxpayer funded bank bailout. Onward with the "bad bank" concept the government proceeded, anyways, oblivious to its critics.

Now the Irish political leadership has informed its sombre citizenry that the banking crisis was far worse than first believed. When NAMA was first established, the authorities believed that the toxic loans being acquired for the "bad bank" would need to be discounted by 30%. Now, an embarrassed government concedes, the actual discount of these toxic loans are coming in at a far worse level, a miserable 47%. Ireland's beleaguered Finance Minister, Brian Lenihan, has stated that the Anglo Irish bank alone would be receiving from the taxpayers €8.3 billion in just the coming week, with a strong possibility that an additional €10 billion would almost certainly be required to cover anticipated losses at Anglo Irish Bank. All told, it is now being declared by Dublin that toxic loans by Ireland's banks may cost taxpayers a staggering €32 billion, equal to more than $43 billion at the current exchange rate. Considering that Ireland has a population of 6.2 million, this reflects a charge of nearly $7000 for every Irish man, woman and child towards the cost of bailing out financial institutions that, in the words of Finance Minister Lenihan, "played fast and loose" with Ireland's national economy.