been appropriate. third, the speed of the required bank deleveraging risked imposing substantial fire sales of assets, which would add to the losses of the irish government. accordingly the risk was high that, at the end of the three years of the programme, the indebtedness of the government, taking account also of the servicing costs of that indebtedness, would be too high for the government to have access to the market at any reasonable terms, and would give rise to the need for a second programme and a prolonged period of uncertainty. so why then did ireland agree to enter the programme? first, because despite these shortcomings, it nevertheless offered the least painful path for fiscal adjustment : that is, the who placed on record that it was “ difficult to state categorically ” that government debt would, “ with a high probability ”, “ be reduced to sustainable levels in the medium - run ”. bis central bankers ’ speeches most gradual path relative to anything else that could reasonably have been expected at that time. 2 essentially, no - one was willing to lend to ireland any more money to allow a more gradual adjustment. indeed, a comparison of the irish programme with what was called for in other programme countries reveals that the irish fiscal adjustment, though effective, was more gradual than most others. that the troika were prepared to go along with a more gradual path may be attributable to the fact that ireland entered the programme with still sizable cash balances, which could be employed alongside the available official funds to smooth the adjustment path. in this way ireland ’ s prompt entry into the programme ( not waiting for months until all cash had been exhausted ) provided valuable room for manoeuvre. from the lenders ’ point of view, it was thought appropriate to proceed with the loan despite the unpromising calculations, in the light of the likely spillover effects on other member states of an irish sovereign default. in short, from the irish point of view, proceeding with the official borrowing was the best thing to do, even though what was on offer was disappointing. given the large primary deficit that then prevailed, any alternative would have been much more painful for the irish people in terms of drastic cuts in services and increases in taxation. what this involved was not merely substituting official for privately - held debt, but also a substantial part of what was being provided was going to pay for further primary ( i. e. non - interest ) deficits for the full period

owned banks points to the opposite end of the budgetary impact of financial globalization. although there was a significant local bank failure, much of the actual and prospective loan losses in the latvian downturn are being borne by the foreignowned banks that made the loans ( the bulk of them denominated in foreign currency, a factor which certainly complicates the assessment of risks and narrows the range of policy options ). these contrasts show the uneven degree of financial globalisation in the european union ( and the european economic area, which embraces iceland ). the banking system in some countries, mostly smaller countries in central and eastern europe, is dominated by foreignowned banks with headquarters elsewhere in the eea. the direct recapitalisation costs of banking failures in those countries are exported back to the home countries, providing a kind of automatic insurance to the host country. ( the primary supervisory responsibility also generally lies with the home country, though the geographical match of risk and regulation is certainly not perfect. ) most eea countries rely principally, though, on locally - owned and controlled banks. indeed, banks that have got into trouble and required rescuing have been shrinking back into their home countries, partly in order to help them meet regulatory capital requirements and partly because the european commission has been taking a jaundiced view of state - aid being used to bolster geographically over - extended business models. the old vision of a seamless european banking market where, regardless of their home country within the eea, the most cost - effective providers would deliver the financial services needed by firms and households may never have been wholly realistic, at least when it comes to retail services. but this vision has certainly suffered a setback from the iceland case, to the extent that the regional ambitions of any bank may in practice be limited by the perceived fiscal capacity of its home government. i have so far dwelt on the problems posed for government budgets by failing banks. the country examples i have chosen are not, of course, the only ones affected. belgium, germany, the netherlands, spain, switzerland and the united kingdom are other european countries which have seen the need for public injections of funds in one form or another. in some cases ( such as switzerland ) the main source of the problem was the participation of banks in the tainted securitisations coming from the us ; in other cases national bubbles were also present. from budget to banks but there are also pressures in the opposite direction, i. e.