The sleepy Greek economy had an uncanny ability to frighten investors over the summer. World markets quaked as highly unionized workers took to the streets in a show of force that ultimately turned deadly.
Panic-stricken commentators at home, meanwhile, said the Greek horror story would inevitably be repeated in the United States.
But the troubled Greek economy has stabilized with considerably less damage than doomsayers had feared. Ironically, the chaos still brewing in Ireland -- a liberalized, turbocharged economy that delivered spectacular growth over the last decade -- may pose a far larger systemic threat.
And as the European debt crisis reemerges, investors would be wise to focus on the different problems faced by troubled countries like Portugal, Ireland, Italy, Greece and Spain that were conveniently lumped together under the catchy PIIGS acronym.
Investors Nervous Despite Deal
Politicians on the continent put aside months of brinkmanship over the weekend as the situation became more serious. The contentious issue of Ireland's low corporate tax rates was cast aside and the country formally requested an aid package. An estimated 95 billion euros will be made available to Ireland. But stock markets sold off Monday and investors remain nervous.
Ireland may be far more difficult to stabilize than Greece, counter-intuitive as that might seem. Ireland, after all, was the seen as a sophisticated and booming economy while the Greece struggled with basics like tax collection. With a GDP per capita of about $60,000 by some measures, Ireland ranks as among the wealthiest members of the OECD, while Greece comes in at about only $32,000.
But as the credit fueled boom in the United States demonstrated, rampant growth can end with far more carnage than sustainable stagnation. Indeed, Ireland resembles Iceland -- another former European star that embraced free markets to boom and then bust -- more closely than Greece. Like Ireland, Iceland is a wealthy country and has a GDP per capita of about $52,000.
Iceland, of course, was among the countries most ravaged by the financial crisis. The country saw its banks nationalized, its stock market plummet, had to rely on a loan from the IMF and saw GDP contract by a gut wrenching 5.5% during the first half of 2009.
With a GDP of about $17 billion, the country is a fraction of the size of of the $268 billion Irish economy. While Ireland hardly faces the kind of nightmare that Iceland did, the experience is still useful in illustrating how destructive a major credit bust can be.
Another Real Estate and Banking Story
"In Iceland, an extraordinary credit boom took place after the country's banks were privatized in 2003 and were inadequately regulated," analysts at the consulting firm McKinsey wrote in a research report earlier this year. Total debt to GDP rose by more than 900% between 2000 and 2008 to reach an astounding 1,189% of GDP. Iceland's financial sector debt alone hit 580% of GDP.
"Ireland had a similar credit boom after 2001, when it actively sought to market itself as an international financial services hub," the analysts wrote. Total debt to GDP doubled between 2001 and 2009 to over 700%, with financial sector debt accounting for half of the total at 421%. Capital inflows fueled a real estate bubble, and real estate accounted for 61% of Ireland's outstanding domestic credit.
"As with Iceland, the intensification of the financial crisis in late 2008 caused asset prices to fall steeply and plunged the economy into deep recession," the analysts wrote.
Scrambling to prevent even more panic, Ireland guaranteed bank liabilities and put itself on the hook for the bad loans made by the financial sector.
But Ireland may enjoy an advantage thanks to the euro. While critics often point to a "euro straight-jacket" in tough times because the common currency minimized monetary adjustments, at least Ireland like Greece will be spared a devastating currency run like the Icelandic krona saw.
Riots and protests like those that swept across France last month get plenty of attention and can rattle markets. But investors should remember that it's ultimately easier to resolve crises that are more bark than bite.
The quiet crisis in Ireland, in other words, should be more worrisome than the chaos from Greece that flooded the airwaves over the summer.