Despair! That's the one overpowering feeling that hits me as I follow the Irish tale of gloom. Every testimony of a young professional looking at migrating for better (actually, just about any) job opportunities is a story of survival. What can a nation that is experiencing such a drain of its future hope for?

At the bailout press conference you could almost feel the anger, confusion and sense of loss of the Irish people present there. Prime Minister Brian Cowen couldn't tell his people how much the bailout would be, how it would be drawn down, nor how long it would take to get Ireland back on track.

The only thing he could tell them though was that he was not to blame for the current situation.

So who is to blame? Is it the Irish people, who are paying with their jobs, livelihoods, and futures? - Is there an answer to who caused the Celtic Tiger to be reduced to mews?

From the Tiger to the Dodo

An estimated deficit of 32.5% of GDP for 2010!

Total Government debt at 80% of GDP!

Ireland is still badly hit despite efforts to prop up its insolvent banking system.

However, Ireland's underlying problems a are different from those of Portugal, Italy, Greece and Spain (commonly referred to as PIIGS, with the inclusion of Ireland). The root cause of the financial crisis in these nations was unsustainable welfare spending which led to the creation of high and structural public deficits. Uncompetitive factor markets added another blow to their economic woes. These nations opted for deficit spending to artificially increase living standards; used deficits to finance the unemployed, public employees, and pensioners, which in turn served to sustain inflexible labour markets.

Such irresponsible economics was only possible because it was taken for granted that if the situation worsened (as it eventually did), the other Euro nations would step in to prevent the fall of the Euro by bailing these governments out.

However, Ireland was different. The Irish problems were created, not by an excessive welfare system, but by socializing the losses of a privileged banking system.

With one of the lowest corporate tax rates in the Economic and Monetary Union (EMU) - 12.5% - Ireland attracted foreign banks and businesses looking for new territories to expand. As a consequence, Ireland's banking sector boomed. During the good years, credit expansion policies and government backing ensured that the banking sector saw growing profits. However, with time, these credit expansion policies presented Ireland with a should-have-been-expected problem - a housing bubble, which caused Irish banks substantial losses and even insolvency when the bubble finally burst. Following up on this fiasco, the Irish government guaranteed all Irish bank liabilities, thus socializing the banking industry's losses.

Euro-zone governments believed that bailing out Ireland would take the pressure off Portugal. Now Portugal is important because they have large investments from Spanish banks. Hence, if Portugal were to fall, the Spanish banking system would fall along with it. At this brink, the situation would be uncontrollable. And thus, the pressure on Ireland to accept the bailout. There are ofcourse other reasons, for instance, the fact that English, French, and German banks had invested important sums in Ireland. Ironically Ireland's losses wielded enough influence to eat up the capital of European banks and bring down the whole European banking system and its allies - European Governments.

Since the crisis, Irish banks have depended on monetary support from the European Central Bank. Without this support, Irish banks would probably go bankrupt, which would spell disaster for the Irish government. The ECB refused to continue its support, when Ireland's government resisted the bailout earlier on. To add to this, Germany threatened to withdraw its guarantees for over-indebted euro governments, which would ensure that these governments fail given soaring interest rates. This has put Germany in a commanding position leaving no option for other nations.

Chirag Mehta is Fund Manager, Commodities for Quantum Mutual Fund and manages the Quantum Gold Fund ETF and the Quantum Gold Savings Fund among others.

Disclaimer:
The views expressed in this Article are the personal views of the author Chirag Mehta and not views of Quantum Asset Management Company Private Limited(AMC), Quantum Trustee Company Private Limited (Trustee) and Quantum Mutual Fund (Fund). The AMC, Trustee and the Fund may or may not have the same view and DO not endorse this view.