Default looms over the Irish economy as credit rating agency Standard & Poor’s said the cost of the Anglo Irish Bank recapitalization could cost more than EUR35 billion, which could lead to further downgrading of the Irish economy’s rating.

Anglo Irish Bank is to be split into two entities, according to the government, an ‘asset recovery bank’, which means a bank which will try to squeeze whatever value is left in the grossly devalued property deals to which Anglo loaned money, and a funding bank, which will hold deposits. Trevor Cullinan, an analyst at Standard & Poor’s, told Irish radio that this is likely to cost at least EUR35 billion. To date, the Irish taxpayer has pumped nearly EUR23 billion into Anglo Irish.

This places the Irish government in a tricky position. According to Bloomberg News, the Irish government may soon have to decide whether it can fully repay its bondholders (that is, the institutions from which it has borrowed), or tackle the towering budget deficit, caused in large part by the bailout of Anglo Irish and the other troubled Irish banks.

Greg Venizelos of BNP Paribas told Bloomberg that, “It’s a key test for the market. The cost of the
Anglo Irish bailout is too high for Ireland to afford without jeopardizing its fiscal position.”

According to Down Jones newswires, Gary Jenkins, the head of fixed income research at Evolution Securities, said "It was only last week that Irish Finance Minister Brian Lenihan was quoted as saying that 'It's unthinkable that Ireland would default on senior debt or that Ireland's banks would default on senior debt,' and that 'Ireland is not prepared to be some kind of social experiment for bank default'.”

"So either the unthinkable has become thinkable or the rating agency has got this one wrong," he said.

Three weeks ago, Bloomberg News had pointed out that the Irish government’s bank bailout pledged had already put its debt at a position higher than that of Iceland, which a 22.4 percent probability that the country would default within five years.