The government has finally admitted the economy will contract by 8% this year. The drop in living standards will be the largest in Irish history. Several banks are likely to be nationalised or possibly wound up. The price of goods is set to plunge by 4% this year as a period of deflation sets in.

But could even bigger shocks to the economy be on the way? Stock market analysts, bond strategists and economists have differing views about what else is in store. Below we describe the four potential nightmare scenarios that could still unfold, and rate their chances of happening.

Sovereign debt default

This is the most often discussed threat to the Irish economy and it would arise if the government no longer had sufficient funds to meet its borrowings.

Debt service costs, which are rising rapidly, are nowhere near causing the exchequer a problem. Sovereign debt defaults are also highly rare: in the case of western European economies they are literally unknown. Even Iceland did not suffer a sovereign default, being brought to its knees instead by a banking collapse and the refusal of international lenders to provide the country with funds.

While the markets perceive that the threat of an Irish default is rising, countries defaulting on their bond debts are more common in South America and Russia. The Irish government would be likely to appeal to other eurozone countries for assistance before coming to a position of a sovereign default.

Some countries such as Ecuador have deliberately decided to default on their bond debts, but no European country is likely to do this this.

Likelihood: Two out of 10

Banking collapse

This is the event that most spooks those involved in buying Irish government bonds or even taking positions in Irish companies. Could the sheer weight of liabilities amassed by AIB, Bank of Ireland, Irish Life & Permanent (IL&P), Irish Nationwide, EBS and Anglo Irish Bank plunge Ireland into an Icelandic-style collapse?

Already the government is guaranteeing all the liabilities of these banks, which represent almost 250% of GDP. After last week's events the government is now prepared to burden the taxpayer with the write-downs of the banks' property-related assets.

So far the markets (via Irish bond spreads) have accepted this as a wise course, but that view may not necessarily persist and the scale of the write-downs on these assets is the key number Ireland's international lenders want to know about.

The banks also need to keep funding themselves and another emerging danger is that, even with a government guarantee, this could prove impossible. The banks could also be hit by a dangerous wave of deposit withdrawals that would seriously hurt their liquidity. So far there has been no sign of this, but it cannot be ruled out.

In the case of Iceland the wholesale markets just shut down to the country's banks. In Ireland's case, things are somewhat different in that the ECB is on hand to provide liquidity to Irish banks.

Likelihood: Four out of 10

Collapse in public finances

This is somewhat related to the question of a sovereign default. Ireland's tax base is shrinking at alarming speed and spending reductions to date, however painful they may be, have been relatively minor in the context of the overall problem.

If the tax base keep shrinking and unemployment keeps rising, the country's ability to borrow could be seriously compromised, causing the public finances to collapse.

The problem is simple – the government is forced to cut spending and raise taxes and this leads to a weaker economic performance, prompting the government into another wave of spending cuts and tax increases. Economists call this the ultimate negative feedback loop.

Peter Bacon hinted at this danger himself in his NAMA report: "The domestic fiscal adjustment process has the characteristics of a vicious spiral, comprising weakening economic activity leading to widening of the government deficit and indebtness leading to discretionary fiscal adjustments leading to further erosion of the economic activity and so on."

Likelihood: Four out of 10

EU-lead bailout or rescue attempt

This is the most likely of the four scenarios. While it seemed far-fetched a few months ago, a European or even IMF-led rescue programme for Ireland is now openly discussed on the fringes of EU meetings and in newspapers throughout Europe.

The IMF is due in Ireland shortly to do its annual economic inspection. But its somewhat austere record is unlikely to prove very appealing to Ireland's politicians, never mind the public. Far better that the Europeans, led by Germany and France, provide some kind of assistance, Ireland's political classes are likely to conclude.

The European Central Bank could also aid Ireland, either by standing over our bond issuance or simply extending hard cash as part of a stabilisation fund. The euro project has a no-bailout clause at present, but this could be overridden by political decisions made elsewhere.

While ECB backing for bond issuances would probably not involve Ireland having to pay a painful price, direct infusions of cash would involve highly austere measures and the possible loss of Ireland's cost advantages, such as its 12.5% corporate tax rate.

Likelihood: Six out 10