Ireland is having a Lehmans moment

We've been here before: the financial markets get jittery, confidence drains away, signs of distress quickly develop into a full-scale bank run. No question: Ireland is facing its Lehman Brothers moment. With money being withdrawn from banks, the idea that the International Monetary Fund and the European Union can conduct leisurely negotiations with the Irish government is a fantasy. The next 24 hours will be vital – and not just for Ireland.

Let's just recap what happened in September 2008 when the US treasury decided to allow Lehmans to go bust. The next month saw mayhem in the markets, ending in co-ordinated packages to rescue tottering banks. Global growth collapsed in the deepest downturn since the second world war.

Ireland's plight has strong echoes of Lehmans in 2008. It is on its uppers; it has made bad decisions; it cannot survive without massive help. On the face of it, Ireland is not systemically important to the global economy and cannot be described as too big to fail. That is the theory. In practice, Ireland is certainly too big to fail. George Osborne knows it. Angela Merkel knows it. The IMF's Dominique Strauss-Kahn knows it. The ramifications of allowing Ireland's stricken banks to suffer would be profound and swift. The UK's loan exposure to Ireland is bigger than any other country; Royal Bank of Scotland and Lloyds, the two part state-owned banks, are between them exposed to £80bn, so Osborne is being somewhat disingenuous when he says Britain's willingness to put money into a bailout is down to being a "good neighbour". A banking collapse in Ireland would be negative for UK trade, UK banks, UK gilts and the pound. If, as looks likely, the government puts £7bn into Ireland as part of an EU rescue and pays its share of any IMF fund, this will not be charity: it will be a hard-nosed business decision to minimise collateral damage to the UK. Money well spent.

For Merkel and other eurozone leaders, the fear is of contagion. In the case of Lehmans, bankruptcy spread through the banking sector. In Ireland's case, it would be to other peripheral eurozone members. Portugal would be the next domino to fall but the real concern is Spain, which, like Ireland, is suffering the after-effects of a bubble in its housing market. Spain has 20% unemployment, rising to 40% for young workers, and is ripe for a fresh downturn. A speculative attack on Spain would put the euro itself at risk.

http://www.guardian.co.uk/business/2010/nov/22/ireland-bailout-european-debt-crisis

though with a duopoly of conservative parties and conservative moral leaders (clergy), it's looking iffy