This New York Times lede from Friday is terrific, conveying as it does the Bizarro world of the Irish bailout:

Cut Ireland’s minimum wage? Check. Collect more in property taxes from beleaguered homeowners? Check. Raise the corporate tax rate, which could plug the gaping hole in Ireland’s tattered balance sheets even faster? Well, no.

It leads into a nice overview of how Ireland arbitraged corporate tax rates to lure multinational corporations to its shores (see Bloomberg for more on that scam).

But there’s a pretty big hole in the piece. Anyone not following this story closely would probably think that the Irish government is getting bailed out because it overspent on its welfare system—that’s the downside of the lede. But it’s not true. All of those things mentioned at the top are being done to bail out a private sector that caused the Irish crisis in the first place. That’s critical context.

Take it away, Martin Wolf:

Back in 2007, Ireland’s net public debt was just 12 per cent of gross domestic product. This compares with 50 per cent in Germany and 80 per cent in Greece…

Then came the “Minsky moment”. Financial markets changed state, asset prices collapsed, all the dreadful lending emerged into view and the Irish government rushed to guarantee its banks. The combination of the guarantees with huge fiscal deficits caused by private sector retrenchment… has caused an explosion of public indebtedness. But this calamity is the consequence of the crisis, not its cause.

Paul Krugman puts this in layman’s terms (emphasis mine):

The frenzy was financed with huge borrowing on the part of Irish banks, largely from banks in other European nations.

Then the bubble burst, and those banks faced huge losses. You might have expected those who lent money to the banks to share in the losses. After all, they were consenting adults, and if they failed to understand the risks they were taking that was nobody’s fault but their own. But, no, the Irish government stepped in to guarantee the banks’ debt, turning private losses into public obligations.

Before the bank bust, Ireland had little public debt. But with taxpayers suddenly on the hook for gigantic bank losses, even as revenues plunged, the nation’s creditworthiness was put in doubt. So Ireland tried to reassure the markets with a harsh program of spending cuts.

Step back for a minute and think about that. These debts were incurred, not to pay for public programs, but by private wheeler-dealers seeking nothing but their own profit. Yet ordinary Irish citizens are now bearing the burden of those debts.

It’s pretty astonishing when you think about it. It shows how the financial industry’s vice grip is hardly limited to American politicians, and it sets up an untenable political situation—to put it kindly. Is Intrade taking bets on Irish social unrest in the coming months?

Wolf has a common-sense prescription that would help head that off:

The crisis is a huge challenge for Ireland, which should surely convert unsecured bank debt into equity rather than force its citizens to bail out all the improvident lenders.

But Ireland’s not going that way—yet. Instead it’s taking $13 billion from its pension fund to finance the bailout. Yikes.


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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.