AS IRELAND BRACES itself for Thursday’s revelation of the final cost of the Anglo bailout – which Standard & Poors estimates will run to €35 billion – the eyes of the international financial press are still firmly trained on Ireland.

The Financial Times claims European policymakers are “in denial” over the extent of the crisis, “as were their Greek counterparts”.

Until very recently, markets turned a blind eye to Ireland’s highly compromised public finances and to the massive potential cost to the Irish exchequer of its blanket bank-guarantee programme. But since August 2010, there has been an abrupt turnround in market sentiment.

It goes on:

The elephant in the room being glossed over by European policymakers is how extraordinarily difficult it is to make large budget adjustments within the straitjacket of eurozone membership, since that straitjacket precludes the possibility of currency devaluation to boost exports as an offset to fiscal tightening.

The Irish government is hoping that Ireland will somehow grow its way out of its public finance problem. However, such hopes would seem to be fanciful.

It concludes that European policymakers will try to “paper over” our solvency problems by recourse to the IMF and EU. If it is inevitable that Ireland reneges on the government’s debt obligation and “exits from the euro”, the newspaper conlcudes, “it is better that it be done quickly without pointlessly prolonging pain”.

In the absence of debt restructuring and of a euro exit, IMF-imposed austerity runs the real risk of plunging Ireland deeper into depression and deflation.

Meanwhile, in today’s Guardian, Goldman Sachs says calling in the IMF now looks inevitable for Ireland. It quotes Erik Nielson, Goldman’s chief European economist:

The [Irish] government needs to do something urgently to regain the love of the market. Without it I think they might end up needing help next year.

The BBC’s business editor Robert Peston explains to his readers “why Ireland can’t afford to punish reckless lenders to its banks”. He warns that:

Ireland’s dependence on credit from abroad is so great that the economic consequences of that credit being withdrawn would be catastrophic…Total foreign bank exposure to Ireland’s economy is $844bn, or five times the value of Ireland’s GDP or economic output. Of that, German and UK banks are Ireland’s biggest creditors, with €206bn and €224bn of exposure respectively.

To put it another way, German and British banks on their own have each extended credit to Ireland greater than Irish GDP. Which doesn’t sound altogether prudent, does it?

He goes on:

An economy as open and as dependent on foreign finance as Ireland’s cannot afford to alienate its creditors. If those overseas lenders asked for their money back now, Ireland’s recent fall back into a modest economic contraction could spiral into dark deep prolonged recession or even depression…the Irish economy is hideously and perilously balanced between recovery and Armageddon.

Peston points out how NAMA represents “one of the many paradoxes about the Irish crisis” in that it has crystallised the losses at Irish banks, despite being a fund set up by the government.

In one way, it looks like good news for the Irish taxpayer that NAMA is purchasing these dodgy loans at the market price. Except for one thing. The huge losses incurred by the banks on the NAMA transfers deplete banks’ capital – which then has to be topped up by (you guessed it) Irish taxpayers and the National Pension Reserve Fund…The banks and the Irish state are more-or-less one and the same thing right now. And the greater are the banks’ losses, the greater the strain on taxpayers.

Peston, who interviewed Finance Minister Brian Lenihan last week, says he refused to rule out drawing on the support of the European Financial Stability Fund, the special €440bn fund set up by eurozone members to lend to financially challenged statess

He daren’t say no, nay, never – for fear that those all-important overseas creditors lose confidence in the existence of backstop insurance to cover their cripplingly huge claims on the Irish banks and the Irish state.

Reuters’s Felix Salmon blog takes up the theme:

The implicit assumption here is that if the Irish government took away its backstop of Irish banks’ debts, there would be a mad dash for the exits, all of the banks’ creditors would refuse, overnight, to roll over any of their debts and the resultant liquidity crisis would make the Lehman collapse look positively modest.

It’s like there’s a whole new level to the famous adage: if you owe the bank $10 million, then you have a problem. If you owe the bank $10 billion, then the bank has a problem. But if you owe the banks $844 billion, then now the problem is back on you again, since at any time the banks can turn you into Iceland overnight.

His conclusion doesn’t offer much solace for the Irish taxpayer:

At the first whiff of a haircut, everybody’s going to want to be the first to bail out entirely. Ireland’s technocratic elite seems to understand that and so it’s unhappily bailing out its foreign lenders at 100 cents on the euro, even [sic] the government continues to slash spending domestically. It’s not fair, everybody knows that. But it might be unavoidable.