The bailout of Ireland will come largely from the European Financial Stability Facility, the great big bailout fund that the European Union set up.
But that fund doesn’t have any money in it. Not yet, anyway. Next month, the fund will start raising money — by borrowing money from the same global investors who recently grew wary of lending money to Ireland.
The fund is guaranteed by 14 EU countries, including Spain and Portugal, which are having troubles of their own borrowing from investors these days.
"Portugal, who can’t borrow is guaranteeing this," says Satyajit Das, an author and financial risk consultant. "So you've got basically, people being lent to who can't pay you back, and the guarantors aren't solvent either … so what exactly are you doing?"
To be fair, other European countries like Germany, Austria and France, which are in much better financial shape, are guaranteeing the fund as well. Scott Mather, a managing director at the huge bond investor Pimco, says he is considering lending money to the stabilization fund, despite the fact that Pimco is not currently investing in Irish government bonds.
Still, the more the fund is used, the more troubled countries like Spain and Portugal will be on the hook for their guarantees. That will only make investors more nervous about lending money to Spain and Portugal — which will make it more likely that Spain and Portugal will need a bailout.