How is it that one of the strongest countries in the EU suddenly drops into financial distress? Ireland is waiting to hear how they will be spending their money in 2011. The budget for 2011 will be voted on which consists of tax hikes and spending cuts after accepting a $113 billion bailout (85 billion euros) from the European Union.
Was Ireland over-levered like Greece? Well, Ireland's banks were way toooo big! Ireland's banks are about 9 times as big as the country's GDP (bank's assets are 872% as large as GDP). What does that say in poor financial times? Well, when looking at a bank's balance sheet, assets are made up of investments. If banks are not properly hedged or are performing in unfavorable investment decisions, that can mean big losses in bad financial times. And, who is to say they were not participating in Credit Default Swaps.
The important thing to take away from Ireland's financial distress is how their banks are soo large that bailout would not be possible without the EU. Small countries like Greece, Portugal, Iceland all need to learn, but more importantly the other small countries with bank assets much larger than GDP need to begin realizing that being levered could strongly put the country in financial suicide. Sure, every investor wants high returns so some investments may look better than others but these governments need to continue bank stress tests so that the occurences will stop happening.
