Once a bubble bursts, it stays burst right? Ireland inflated the second-largest residential property bubble in the industrialised world in the past decade and all around us we can now see the terrible after-effects – plunging economic growth, impaired bank assets, escalating unemployment and, of course, mountains of debt, public and private.
Despite this appalling legacy, the public has at least been able to console itself with the thought that once you prick the bubble, the nightmare results are immediately visible and then it's very much a case of taking the pain up front and waiting for the recovery.
Well, not necessarily. Ireland's already dramatic property crash could yet have a macabre second act. In the second and final part of the tragedy, the thing we all wish for – a global economic recovery – may yet plunge Irish households into a fresh but familiar nightmare, one vividly recalled by anyone who owned their own home in the 1980s when interest rates peaked at 18% (ironically almost the same level as unemployment hit at peak).
The European Central Bank (ECB), which kept interest rates too low for too long from an Irish perspective, is the body that is likely to be the agent pushing Irish households towards this second calamity.
The bank, a Franco-German-dominated institution, has to its credit slashed rates to 1%, but this is still the highest rate in the G7 and came way too late to stimulate the eurozone, most notably sickly Ireland. As a result of its slow response to the financial crisis, Britain and the US will come out of this financial crisis before the eurozone.
But the big problem is not that key ECB players are now catching up in the interest rate-cutting cycle. No, instead they are talking openly about raising rates in the future to ward off any possible inflationary pressures.
Arguably the most influential figure on the ECB, apart from its president, Jean Claude Trichet, is Bundesbank president Axel Weber, who also sits on the ECB's governing council. His comments last week that rates will need to go up before inflation risks materialise will send a chill up the heavily mortgaged spine of every Irish home owner.
"Raising interest rate levels as a precaution when it isn't initially required with respect to medium-term price developments certainly is a challenge from a communication point of view," Weber said last week.
He is sure right on the communication part. But the message is clear, this isn't going to be popular, but we are going to have to do it.
Unfortunately for the indebted classes here at home, the faster the US, Europe and the rest of the world recover, the more likely inflation is to spread its wings, particularly after so much pump-priming by central banks. The only way to curb this inflation will be interest rates hikes by the likes of the ECB and the Federal Reserve in the US. That's when Ireland's property crisis really gets nasty.
Remember household debt in Ireland has doubled in the past five years, largely due to enormous increases in mortgage borrowing. It is not just family homes either: almost 30% of outstanding residential mortgage lending is in buy-to-let properties. In terms of the raw numbers, there was €30.6bn of borrowings in this category at the end of March, according to Central Bank figures, with about €81bn of debt tied to conventional dwellings.
These high borrowings are also going to be hanging around the financial system at a time when incomes are shrinking thanks to employers demanding pay cuts, and taxes are rising as the government tries to balance its own books.
Exacerbating the problem is that Ireland is not only in love with mortgage debt, the country is in love with variable mortgage debt. The level of defaults on Irish mortgages, comparatively speaking, is relatively low at present, but the danger from rapidly rising interest rates, as other parts of the eurozone come out of recession, is definitely something to worry about. One can only hope Weber is ignored for as long as possible.
A fresh rate-raising campaign is also likely to put renewed strain on bank balance sheets, with both commercial property projects and residential homes coming under equal repayment pressures.
It is possible within a year that Ireland will still be suffering from deflation, but Europe will be administering, via Frankfurt, harsh medicine of higher interest rates, brought higher to suit the big countries such as France and particularly Germany.
Ireland's voice at that stage will be even feebler at ECB level. We will be in the second year of an economic contraction and our ability to influence events in Europe will be massively reduced because we will be using the benefits of euro membership to raise money for the exchequer via the bond markets, which only really rate our credit credentials because we have the euro as our currency.
But wait. The ECB has been extraordinarily slow-moving in this crisis and has often seemed to react to events months after a quick and decisive response was needed. When it comes to interest rates and ECB monetary policy generally, let's hope this tardiness and lethargy remain in place for many years to come.