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Berry Fleming this week holds a placard in the main shopping area of Dublin (PETER MUHLY/AFP/Getty Images)
Berry Fleming this week holds a placard in the main shopping area of Dublin (PETER MUHLY/AFP/Getty Images)


The slaying of the Celtic Tiger Add to ...

Anglo Irish Bank's unfinished head office pokes into the sky on Dublin's North Wall Quay, a silent testimony to the rise and fall of the Celtic Tiger.

The eight-storey shell of what was supposed to be Anglo Irish's glittering new headquarters is both a symbol of Ireland's ascent out of a wretched history of poverty and despair and a constant reminder of the massive housing and property bubble whose collapse has sent Ireland cascading into what is effectively national insolvency.

Riding the back of the Celtic Tiger, the once-tiny, private investment bank blossomed into arguably the most powerful financial institution in Ireland. Anglo Irish led the way as developers, its rival banks and the Irish people engaged in a frenzy of construction and speculation that will hang over the country for years if not decades.

Anglo Irish is now a ward of the state, a recipient of tens of billions of Euros in bailout money. Ireland itself is a fiscal mess, thanks to a budget deficit that makes Greece's look like spare change. The real estate market is a disaster, and interest rates demanded by bond investors are so high that the exchequer effectively can't afford to finance the country.

The Irish government has some breathing room - it doesn't have to return to the capital markets until next July. But if that bond auction fails, the country will almost certainly be broke and require a bailout from the European Union.

At that point, the ailing Celtic Tiger would become a dead kitten. Ireland is preparing to unleash a draconian combination of massive spending cuts and tax increases next month. But that risks an economic death spiral where the economy continues to shrink along with government revenues.

Ireland's virtually collapsed bond market is a painful reminder to investors, politicians, taxpayers and businesses that the euro zone's debt crisis, triggered by Greece last spring, is far from over. Quite the opposite: More bailouts are all but certain, and a permanent sovereign debt restructuring mechanism needs to be drafted. At a minimum, such a mechanism would extend the bond maturities of distressed countries, but might also impose "haircuts" on bondholders, as Germany wants, in an effort to shift some of the burden of rescuing an economy away from taxpayers and on to investors.

The soaring bond yields in Ireland, Portugal, Spain and Italy this week suggest investors expect debt defaults at some point, triggering multiple rescue packages and possibly shattering confidence in the entire euro zone experiment. On Thursday, as Irish bond yields surged to their second record-breaking day in a row, European Commission President Jose Manuel Barroso sought to curtail the bond-dumping mania by offering Ireland a European Union bailout, should it ask for one. So far, it hasn't.

Most economists do not fear a repeat of "Acropolis Now," the Greek-inspired near-shredding of the euro zone six months ago. Ireland's woes are not expected to lead to a bond- and currency-wrecking contagion that infects the entire EU. But Ireland is being closely watched in part because a bailout would be the first test of the new €440-billion ($608-billion) sovereign debt rescue fund, known as the European Financial Stability Facility (EFSF), devised for the Greek crisis.

And investors beyond Ireland and Portugal are getting increasingly nervous. On Friday morning, the yield investors demand to hold 10-year Italian bonds over benchmark German bonds widened to 1.86 percentage points, the most since the euro was born a decade ago. Spanish bond yields also rose to a record high, partly on news that Spain's hesitant growth had stalled in the third quarter as austerity measures kicked in. The euro sank to a five-week low against the dollar.

As Ireland moves closer to a bailout, the weakest EU economies - Portugal among them - may be forced to follow it, resulting in a costly bill to EU taxpayers and renewed questions about the wisdom of the euro's use in peripheral euro zone countries.

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