There is no such thing as free money. For Ireland, there is not even cheap money any more. The bailout being negotiated between the government and officials from the International Monetary Fund, the European Commission and the European Central Bank will cost this country dearly.

As Central Bank governor Patrick Honohan correctly pointed out last week, the word 'bailout' is technically inaccurate in our circumstances; the best Ireland can hope for is a loan. In other words, we will be taking on more debt. And debt means interest payments.

Depending on the structure of the rescue package, we could end up paying around 5% on the reported €100bn bailout coming our way. If we draw down all that money – to recapitalise the banks, to replace their disappearing deposits, to bridge the exchequer's revenue shortfall – we will be on the hook for €5bn in annual interest payments. That figure is not far off the supposedly 'savage' cuts of €6bn expected in the 2011 budget. In fact, it almost doubles the adjustment.

Those interest payments are in addition to the payments we have to make on our existing national debt, which already stands at €90bn. Those borrowings are being paid off at a blended rate of over 4.5%.

With more borrowing needed – up to €20bn in the next year alone – bond investors have been very nervous about our ability to pay. It's not just the rate, it's the quantum. With debt climbing way beyond 100% of GDP, the economy will have to grow at a rate beyond the interest rate for Ireland to get ahead of its payments. But even the most optimistic forecasts are for sluggish growth in the next few years in the 1%-2% range. A bailout loan does nothing to help that.

Ireland is effectively trying to solve its debt problem with more debt. Imagine a mortgage borrower who can't make the payments on their home loan going to a new bank to ask for a bigger mortgage to help with cash flow on the first one. That is precisely the kind of thinking that got us into this mess in the first place. Without astronomical economic growth, the payment demands quickly get out of control.

Finance minister Brian Lenihan has on his desk a report by the mortgage expert group which outlines precisely this problem as it applies to households, but stops short of a solution beyond 'forbearance'. The dilemma is just another iteration of the problems facing the banks and the economy. Yet Lenihan and the government seem incapable of countenancing the only real solution to all three: debt restructuring.

Households and developers can't pay all their debts, so the banks can't pay their debts, and Ireland gets stuck with a bailout it won't be able to pay. This ultimately ends in default unless we can renegotiate the amounts we owe and the terms under which we can pay it.

Neil Callanan is away