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Ireland’s costly debt fix

Ireland “has stopped spending beyond its means” and recently brought its foreign-trade account into balance, but its virtue has in no way been rewarded, said Colin Barr in Fortune.com.

Colin BarrFortune.com

“Fasting is no cure” for a massive debt hangover, said Colin Barr. Consider Ireland, which needs “a big bailout from Europe” despite having imposed two years of painful austerity on its citizens. The country “has stopped spending beyond its means” and recently brought its foreign-trade account into balance, but its virtue has in no way been rewarded. Wages are falling; unemployment has tripled, to 13 percent; and young people are emigrating in droves. And now bond investors are pushing toward “a back-breaking 8 percent” return on their Irish bonds.

Ireland is paying the price for sticking its citizens with the whole tab for the government’s bailout of the banking sector, which ruined itself with overzealous real estate lending. Now all of Europe realizes that approach is politically and morally untenable, and that bondholders must share in the pain. Trouble is, bondholders realize that too, and they are demanding a premium up front to compensate for possible losses later. For reformed debt addicts like Ireland, Greece, and Portugal, punitively higher rates are “the new norm.”

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