Ireland Moves to Shore Up State-Owned Bank

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It's not a good sign when the government has to intervene to prevent a run on a bank that is already owned by the government, but apparently, that's what it's doing with Anglo-Irish bank:

Irish Finance Minister Brian Lenihan, days after meeting European Union officials, said state-owned Anglo Irish Bank Corp. would be divided into a government-backed bank that would hold customer deposits and an "asset recovery bank" holding the bank's increasingly bad loans. The asset-recovery bank could be sold in whole or part down the road. Mr. Lenihan said the cost of the restructuring would be announced in October.

Ireland's renewed banking problems are sparking fears that the European Union's rescue of debt-laden Greece won't be its last. Earlier this year, the EU and the European Central Bank unveiled a raft of measures to stop the spiraling debt crisis in Greece from threatening the rest of the euro zone.

The Greek problems prompted a Europe-wide effort this year to purge banking fears by stress-testing the continent's 91 biggest banks, in a bid to replicate the U.S.'s 2009 success in restoring faith in its own banking system. But global markets fell Tuesday following a report in The Wall Street Journal questioning the rigor of the European stress tests.

One guesses that the answer is that the restructuring will cost a lot, and the "asset-recovery" bank will be worth very little. The Irish economy has a lot of fundamentals going for it--educated population, good corporate tax rates, and considerably fewer regulatory barriers to doing business than you find in Italy or Greece. But as a real economic boom, driven by European integration, brought increasing incomes, the Irish went on a borrowing binge even worse than our own, and inflated their boom into a bubble. One of my favorite stories of the period concerns a friend of mine, an Irish American who was married to an Irishman living in Galway. The level of status-competition that suddenly blossomed among her relatives and in-laws led her to consider opening a boutique that would literally specialize in ugly things which cost unreasonable sums of money.

Cleaning up after that consumer frenzy is going to be long and painful. As it will be for us, though less so.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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