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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.

MARY LOUISE KELLY, host:

And I'm Mary Louise Kelly.

More trouble today for Ireland, as the prices for Irish government bonds continued to drop. That's despite the promise of a massive bailout, courtesy of the International Monetary Fund and the European Union.

We're going to take a step back now, two years back. That's when the Irish government announced that it would guarantee its banks. Chana Joffe-Walt, with our Planet Money team, reports now on how that relatively tiny country and that one fateful decision inspired bailouts all over the world.

CHANA JOFFE-WALT: By 2008, Ireland had heard the pop of its first-ever real estate bubble. It was over. Colm McCarthy is an economics professor at University College Dublin. He says for a decade, Irish banks had been lending out heaps of money to builders, homeowners, developers...

Mr. COLM McCARTHY (Economics Professor, University College Dublin): Just about anybody and everybody. And people just built and built and built.

JOFFE-WALT: And then global economic crisis hits. A lot of those Irish developers and homeowners were not paying back their loans. The Irish banks were struggling, and the government was worried...

Mc. McCARTHY: ...that the banks were going to go bust.

JOFFE-WALT: So a bold move. The Irish government decided to guarantee its banks. Any losses, they'd step in and absorb. And we're not just talking guaranteeing deposits up to 100,000 euros or maybe 200,000 euros.

Mr. McCARTHY: No, no, no. The Irish government said all deposits without limits. And not just deposits but also bonds that are issued to investors by the banks.

JOFFE-WALT: At this point in the global financial crisis drama, no country had done that. And when Ireland did, the banking competition took notice. This is when the drama moved over to the U.K.

Simon Johnson is an economist at MIT and the Peterson Institute. And he says the government of the U.K. saw Ireland guaranteeing its banks and panicked.

Mr. SIMON JOHNSON (Economist, MIT, The Peterson Institute): If you're in London, and you have two banks next to each other, a big British bank and a big Irish bank, and the Irish bank is backed by government, then you attempted to move your money from British pounds into the Irish bank, where it could be in British pounds, or it could be in euros.

JOFFE-WALT: Which, as soon as Ireland made its announcement, was happening. And so less than a month after Ireland guaranteed its banks, the U.K. did too. Next up was Germany.

Mr. SEBASTIAN DOOLEEN (Economist Professor, University of Applied Science): I think they were a little annoyed.

JOFFE-WALT: This is Sebastian Dooleen, economics professor from the University of Applied Sciences in Berlin.

Mr. DOOLEEN: They were annoyed because that meant then that obviously funds were moving, after this guarantee was made, funds were moving from countries like Germany or France to Ireland because depositors were thinking, well, there my funds are safe. The German government was thinking, well what can we do now? And, well, what they did was this promise to guarantee all private bank deposits in German banks.

JOFFE-WALT: So now, we've got Ireland, the U.K. and Germany guaranteeing their banks, which then got the attention of the European Union. The EU says fine, now we're increasing bank guarantees for all EU countries and putting more capital into EU banks.

Soon after that, for a variety of reasons, the U.S. got into the bailout business too. Here's Simon Johnson again.

Mr. JOHNSON: When the Europeans made these moves, and when the European Union put more capital into their banks or said they would provide capital as needed, I think there was an aha moment for the U.S. Treasury.

They said, OK, this is what the Europeans are doing. We can see this is getting could get out of control here. We need to put more capital into our big banks.

JOFFE-WALT: So Ireland guaranteed its banks, and the rest of us followed suit. But right now, the rest of us seem much better off than Ireland. In the U.S., the government has made back a pretty good chuck of money from the banks. In Ireland, the government is worried their banks could bankrupt the country. Why the difference?

Mr. JOHNSON: The United States did not extend a blanket guarantee. That was smart.

JOFFE-WALT: Simon Johnson says, remember Ireland's move was incredibly bold. It guaranteed all deposits with no limits. And everything else: bonds issued to investors, everything. The United States and every other country's bailout had limits.

The biggest difference, though, was the Irish banks are huge relative to Ireland, to the economy. So for the Irish government to say we'll back all the liabilities of these banks that are so much bigger than we are was probably much too bold.

Mr. JOHNSON: They were too big to save, if you like.

JOFFE-WALT: And so, right now it looks like at least half the money some Irish banks lent out is not coming back. And in the meantime, the thing Ireland was afraid of back in 2008, that bank deposits would leave Ireland for the U.K. or for Germany and elsewhere, that's happening now.

Chana Joffe-Walt, NPR News.

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