As Europe struggles to put together a second bailout of Greece, to supplement the rescue effort launched last year, the crisis may force a second bailout of another indebted country in the region: Ireland.
Dublin, which signed up to an 85 billion euro ($122 billion) bailout from the European Union and the International Monetary Fund last November, is hoping to generate enough economic growth over the next two years to decouple itself from Greece in the minds of investors.
This would permit Ireland to make a full return to funding itself in the debt markets in 2013, after testing the waters in the second half of 2012 with short-term issues.
The outlook, however, is not promising. Concern that Greece will eventually default is keeping the bond yields of weak euro zone states including Ireland so high, and the Irish economy remains so weak, that Dublin risks remaining shut out of the markets for much longer.
They are trying to put a brave face on it, hoping that the economy will pick up, but the numbers don't look that way, said Alan McQuaid, economist at Bloxham Stockbrokers.
At the moment we are a long way from where we want to be in terms of bond yields and growth rates.
Irish Gross Domestic Product growth of 1.3 percent in the first quarter, the fastest pace in over three years, masked a large slump in private consumption, while the buoyant exports that drove this performance risk flagging because of a softer economic outlook for key trading partners.
On a Gross National Product (GNP) basis, which may be a more accurate depiction of the local economy because it strips out profits earned by Irish-based multinational companies, output fell 4.3 percent in the first quarter on a seasonally adjusted basis, the fastest drop since current records began in 1997.
Ireland needs domestic demand to take off if it is to persuade markets that its gross government debt, estimated by the IMF to peak at about 120 percent of GDP in 2013 compared to 157 percent for Greece, is sustainable in the medium term.
But people are hesitant to hit the shops with the unemployment rate stuck close to 17-year highs and the country only mid-way through a six-year cycle of austerity.
The national savings rate is around 11 percent, nearly triple what it was in 2008 when the recession kicked in, and the supply of consumer loans continues to shrink.
BANKS AND BAILOUTS
Ireland's economic crisis has its roots in reckless property deals which pushed the banking sector to the brink of collapse when credit markets froze and house prices collapsed.
Dublin is hoping that pumping an additional 24 billion euros into Irish banks this year, on top of 46 billion euros previously, will convince investors that the lenders are bulletproofed from further shocks.
The government used stress tests that factored in sector loans losses of 10 percent in a worst-case scenario, more than double current loan loss provisions at the two main banks, to come up with its 24 billion euro bill.
But for some investors, the financial sector remains a reason to steer clear of Irish government debt, with mortgage arrears and restructurings set to climb from 11 percent currently as the European Central Bank raises interest rates.
An Irish household debt level of 129 percent of GDP, the highest in the industrialized world according to IMF data, also makes investors queasy.
The banks are still the heart and soul of the sovereign problem, said one London-based bond investor.
Even with the stress tests, with the best will in the world, it is almost impossible to get a very clear picture of what is going on.
Finance Minister Michael Noonan is counting on the 24 billion euro capital top-up for the banks being the last, so that he can use funds left over from dealing with them to cover the cost of running the state until at least the middle of 2013.
Of the 35 billion euros set aside for shoring up banks in the 85 billion euro bailout package, Noonan is hoping he will only have to use around 18 billion, leaving him a total of 67 billion to cover estimated budget deficits and redemptions totaling nearly 58 billion euros between 2011 and 2013.
He would then have 9 billion euros remaining from the bailout for use in 2014. But in that year, Dublin will face an expected budget deficit of 8 billion euros and an 11 billion euro bond redemption which funds in the current bailout will not cover. Raising the 10 billion euros needed to meet the gap entirely from private capital could prove difficult.
The success of the current bailout is also dependent on Ireland keeping its deficits on track and enjoying a large step-up in economic growth of over 2 percentage points in 2012-14.
Last year's bailout deal was viewed as a humiliating loss of sovereignty and ensured a record rout for the previous government in a general election in February this year.
But it might be less controversial if Ireland sought more money by tapping the European Stability Mechanism, the permanent rescue fund which the euro zone plans to establish in 2013; if Ireland had already implemented tough fiscal reforms at that time, the new loans might not come with harsh conditions.
Unlike Greece, Ireland is meeting its fiscal targets under its current EU-IMF plan. But market jitters due to events in Greece, as well as stubbornly weak domestic growth, have pushed 10-year Irish government bond yields to 12 percent in recent days, about double the average cost of funding under the existing bailout.
It will be headlined as a bailout but in reality it's access to cheap funding, said Padhraic Garvey, ING strategist.
Garvey said Ireland might chose to combine tapping the ESM with a return to debt markets in 2013. But even then, wooing private capital would depend on some fair winds.
A lot of good things have got to happen between now and then; house prices have got to stop falling, VAT returns have got to start to pick up. There has been a decent first quarter but it has been all about exports. We need more ammunition.
Oliver Gilvarry, head of research at Dublin-based Dolmen Securities, said Ireland would be better off ruling itself out entirely from a return to capital markets in 2012 and 2013, and should instead take a second bailout that would cover its funding needs until 2016.
Back-of-the-envelope calculations suggest such a bailout might be around 40 billion euros, which could be Ireland's total sovereign funding requirement for 2014-2016 including redemptions, assuming the budget deficit in euro terms did not change much in 2016 from its projected 2015 level. If Ireland had 9 billion euros left from the first bailout as hoped, the second bailout could total some 31 billion euros.
It's the perverse notion that if the market sees that Ireland has been taken out of the capital markets for that time and there are EU-IMF reviews showing that Ireland is meeting its targets, the market will open up, Gilvarry said.
When they see that you don't need the money, perversely they open up.
(Reporting by Carmel Crimmins, Editing by Padraic Halpin and Andrew Torchia)