DUBLIN — Throughout the deepening debt crisis, European Union leaders sought to portray Greece as a unique case in special need of aid. They were proved wrong when Ireland and Portugal required bailouts in 2011.
They're likely to be proved wrong again. And this time, the stakes are higher for the rest of the world.
Economists are confident that Portugal will follow Greece and seek a second bailout, and many expect Ireland to do the same. They agree that if both countries do need further funds in 2013, Europe can comfortably underwrite their cash needs.
The far greater risk to Europe's financial system would be if Spain or Italy — with their vastly larger economies and debt loads — are forced to take a bailout. At stake would be the very survival of the euro, the currency shared by 17 countries known as the eurozone.
Spain and Italy suffer many of the same kinds of problems that inspired creditors to flee Greece, Portugal and Ireland.
Italy's public debt level is not much better than Greece's and worse than Portugal's. Spain, like Ireland, faces a rising tide of business and household red ink tied to spectacular collapses in property prices since 2008 — and could find those crippling private losses transformed into public debt.
At the height of the debt crisis last winter, borrowing costs for Italy and Spain on bond markets hit highs that would have been unsustainable without a bailout.
New austerity-minded governments in Rome and Madrid have helped calm fears, but of far greater significance was the European Central Bank's decision to provide banks more than €1 trillion ($1.3 trillion) in bargain-basement loans. This unprecedented injection spurred banks to snap up battered government debt, driving up the bonds' value and driving Spanish and Italian borrowing costs down again.
Economists warn such relief is only temporary. The eurozone's weakest economies must convince investors they can repay their debts without special help.
Yet the economies of Spain, Italy, Portugal and Greece are forecast to shrink this year, while Ireland alone might eke out a small gain. All are expected to cut spending and raise taxes — sucking money out of their cash-strapped economies.
"Portugal is the next great litmus test for the eurozone," said Constantin Gurdgiev, an economist who teaches finance at Trinity College Dublin. "We know it cannot avoid a second bailout. And Portugal offers a sneak preview of what is going to happen in Spain."
To maintain investors' confidence in the euro, economists say Europe must build a financial "firewall" exceeding €1 trillion, a figure big enough to provide credible aid in the event that Spain and Italy are priced out of the bond markets.
Europe's future rescue fund due to come into force in July, the European Stability Mechanism, as envisioned barely cracks €500 billion — and some €200 billion of that is already earmarked for use in the existing Greek, Irish and Portuguese bailouts. Much of what's left could be hoovered up by a second bailout for Portugal and Ireland and a further bailout for Greece.
European finance ministers meet next week in Copenhagen to discuss plans to raise the firewall by up to another €240 billion, a move being resisted by Germany. But even a firewall claiming a headline figure of €740 billion seems too small to reassure the markets about Spain and Italy, whose government debt stands at a combined €2.6 trillion ($3.4 trillion).
"If we had a rescue umbrella over the whole eurozone for Italy and Spain, which is clearly not the case now, this would reduce the risks involved," said Ulrike Rondorf, a Commerzbank economist in Frankfurt.
Below is a look at the European countries — other than Greece — that economists are watching closely for signs of distress.
SPAIN: The private debt nightmare
Unlike the eurozone's other troubled economies, which have too much government debt, Spain's core problem is the debt lurking in the books of its banks, businesses and households.
The origins of Spain's troubles can be traced to the euro's creation more than a decade ago. The new currency came with eurozone-wide low interest rates. Spanish banks and families binged on cheap loans, which fueled a real-estate boom that came to dominate the economy.
The global credit crunch of 2008 burst Spain's property bubble, throwing hundreds of thousands of low-skill construction workers on to the unemployment line.
Today Spain's jobless represent a staggering 22.9 percent of the work force, far and away the highest in the eurozone. The International Monetary Fund estimates Spain's 2012 economic output, as measured in gross domestic product, will contract 1.7 percent, meaning even less tax and fewer jobs. Spain forecasts unemployment will average 24.3 percent this year.
Yet the EU expects Spain to cut its annual deficits, which last year reached 8.5 percent of GDP, back to the EU limit of 3 percent in 2013. This means two more years of tax rises and spending cuts that, in turn, will depress GDP further.
"There's a real risk that the Spanish economy will get caught in a downward spiral and need a bailout," said Simon Tilford, chief economist at the Centre for European Reform, a London-based think tank.
"Unless the EU changes strategy radically and permits Spain to rein in the extent of austerity, all they're going to do is fuel social tension and destroy Spain's growth potential," Tilford said.
Sensing the danger, the new Conservative government of Prime Minister Mariano Roy this month flatly told the EU it couldn't cut its 2012 deficit to 4.4 percent as previously pledged. It set a new target of 5.8 percent.
For now, Spain's borrowing costs are under control and the threat of a default is receding. Its €700 billion in government debt represents less than 70 percent of GDP.
But the debt exposure of Spanish banks exceeds €2.4 trillion, representing a further 230 percent of GDP. These banks are facing massive write-offs from defaulting construction companies and home owners. This raises concerns because — as witnessed when Ireland's government had to nationalize five banks to prevent their collapse — privately held debt can end up as public property and overwhelm the state's ability to finance itself.
ITALY: Land of terminal debt
The level of Italy's government debt has long appeared to defy economic gravity. In 2010, Portugal and Ireland faced huge pressure to seek a bailout as their national debts climbed toward 100 percent of GDP. Italy, even in good times, has been free to finance itself at a level much higher than that.
Italy's debt, currently at a dizzying 120 percent of GDP — second only to Greece in Europe — is forecast to keep on rising. Economists agree that something has to give.
The European Union's fiscal treaty, due to become law next year, binds countries to reduce their debt gradually to below 60 percent of GDP, a goal also contained in previous EU agreements. In Italy's case, that would mean repaying close to half its current debt of €1.9 trillion ($2.5 trillion), or €16,000 per man, woman and child in the country.
The 4-month-old government of Prime Minister Mario Monti is committed to raising taxes, cutting spending, fighting tax evasion and promoting competition in many professions, from cabbies to pharmacists.
Such austerity will ramp up the pressure on Italy's economy, forecast to contract by 1.5 percent this year, and increase its unemployment rate of 8.9 percent.
Compared to Spain, Italians have been cautious borrowers and stronger savers over the past decade. Still, their private debts exceed €2 trillion or 130 percent of GDP.
Despite their differences, Spain and Italy are put into the same risk basket by bond investors. This means a credibility crisis for one could mean bailouts for both.
Commerzbank's Rondorf said this might be unfair on Italy, given the strengths of its banking sector, but the country's huge debt and weak growth do merit concern.
She said the solution was for the eurozone, chiefly Germany, to finance a European Stability Mechanism firewall big enough to convince creditors that neither Spain nor Italy represented a plausible risk of default. Otherwise, she said, both countries could experience a second round of last year's aggressive sell-off of their bonds, raising their borrowing costs to unsustainably high levels.
"If you look at each turning point in the eurozone crisis, Italian and Spanish (bond) yields always move together. I cannot imagine a scenario where Spain needs help to fund its deficits and Italy does not. They're glued together in market dynamics," Rondorf said.
PORTUGAL: Accelerating in reverse
While many analysts have already written off Greece, they look on Portugal as the next big fight the eurozone's defenders must win to stop investor panic from spreading to Spain and Italy.
"The Greek economy is the equivalent of sub-Saharan Africa," Trinity College's Gurdgiev said. "It's grossly underdeveloped, never had an industrial age and its agriculture is very inefficient. It's truly in the periphery.
"But Portugal is deeply hard-wired through Spain and France into the eurozone economy. It matters," he said.
Portuguese unemployment is more than 14 percent. The Bank of Portugal estimates the country's GDP fell 1.6 percent last year and will drop a further 3.1 percent this year.
Portugal and its more than €160 billion national debt were bailed out in May 2011 by the EU and International Monetary Fund with a three-year credit line of €78 billion ($103 billion). Portugal's government insists it will reassure investors enough to resume medium-term borrowing on bond markets next year.
The bailout terms commit Portugal to deep austerity cuts, trimming government deficits from 2010's level of 9.8 percent to 3 percent by 2013. Its debt-to-GDP ratio that year is forecast to reach at least 106 percent.
And as in Spain, Portugal's private debt figure — 248 percent of GDP — suggests a country of tapped-out credit cards and struggling mortgages that yet could fuel its own banking crisis.
Few analysts believe Portugal's austerity push will do anything other than exacerbate its recession. They argue that Portugal should seek to renegotiate the austerity goals of its first bailout immediately and admit that, if it isn't given more breathing room, a 2013 bailout is inevitable.
Gurdgiev said Portugal would need to reach around 4 percent growth to avoid a second bailout but, under current deficit-cutting requirements, would be extremely fortunate to reach 1 percent growth in 2013.
"Even at 1 percent growth, Portugal is still dead," he said.
IRELAND: Exception to the rule?
That leaves Ireland as the EU's case study of how to grow an economy in the depths of austerity.
Ireland was the first EU country to face a debt crisis when, in 2008, creditors realized just how exposed its six domestic banks were to a property market even more overheated than Spain's.
As the U.S. credit crisis went global, the Irish government took a huge gamble by promising to guarantee to repay its banks' foreign creditors in the event of default. The promise failed to reassure investors and, by 2010, five of the country's six banks were effectively nationalized at a cost that destroyed Ireland's own credit rating. Ireland's deficit surged that year to an EU-record 32 percent of GDP and the country was forced to negotiate a €67.5 billion ($90 billion) bailout.
The property market that roared for more than a decade has left ghost estates of half-developed ruin, most of which are now state-owned "assets."
And even though Ireland has already transferred the banks' biggest toxic loans to government books, the country still suffers by far the worst rate of private debt in Europe: €500 billion ($650 billion), or 340 percent of GDP, in a country of barely 4.5 million.
Despite five austerity budgets since late 2008, Ireland still expects to impose at least four more. It has used the bailout funds to recapitalize the banking sector, but banks remain loath to lend into an economy where unemployment remains stubbornly over 14 percent.
The banks' reluctance is colored by their fear that Ireland faces a new wave of home loan defaults. Bank of Ireland — the only institution to avoid nationalization — says 55 percent of the properties on its mortgage books are worth less than what customers still owe, and nationally about 10 percent of mortgage-holders are in default on their payments. Both trends are forecast to worsen this year.
Nonetheless, the Irish have won EU plaudits for slashing spending faster and harder than anyone else in the eurozone. Ireland's GDP grew 0.7 percent in 2011 and is forecast to grow 0.5 percent this year. Yet Ireland's most recent data, showing falls in GDP for the second half of 2011, means it's currently back in recession for the fourth straight year.
The country has slashed its 2011 government deficit to 10 percent of GDP and expects to reach the EU-IMF goal of 3 percent by 2016.
The Irish rebound, weak as it is, has little to do with membership of the euro. Ireland is the eurozone member most dependent on trade with Britain and the United States. The Irish may be tied to Europe through its currency, but its economic cycle is Anglo-American.
The 600 U.S. multinationals that have chosen Ireland already generate more than 12 percent of Irish GDP.
"Ireland's open economy has a real advantage with its strong American exposure, culturally and financially. But it's also true that when America sneezes, Ireland is the first to catch a cold," Gurdgiev said.
However Ireland's buoyant headline GDP figure paints a misleading picture. Unusually, foreign companies operating in Ireland are allowed to transfer their profits back home without penalty.
Economists seeking a more relevant picture of Ireland's economic health dismiss GDP — which includes the multinationals' expatriated money — and use a different yardstick: gross national product. And Irish GNP kept dropping in 2011 and is forecast to fall further this year in line with emigration, small business closures, and a property market still searching for the bottom.
"Ireland is not a success story for austerity. Its underlying numbers are dire," Tilford said. "If any country can dig itself out, it's going to be Ireland, but at what cost?"