BUSINESS OPINION:There are strong doubts about whether Ireland has an accurate measure of the scale of the problem, writes DOMINIC COYLE

IT’S A question of time.

The Government’s decision to adopt an austerity programme ahead of its peers as most of the global economy spiralled into recession has consistently drawn approval. Only last week, Canadian finance minister Jim Flaherty hailed Ireland, saying it had led Europe in taking the “necessary courageous decisions towards fiscal consolidation”.

The trouble is that, unlike, say, Greece, tackling a slowing economy is not our biggest problem. The collapse of our banking system presents a far bigger challenge and, while it is true that Ireland was also quick in moving to address the situation, almost two years later there is little sign that it has the situation under control.

Indeed, there are strong doubts that it even has an accurate measure of the scale of the problem.

It is against this backdrop that foreign investors are judging Ireland Inc – and it is also the scenario in which ratings agency Standard Poor’s last week decided to downgrade Ireland’s sovereign debt by one notch.

SP’s decision to assign Ireland’s sovereign debt a negative outlook even at this lower level triggered unprecedented public criticism from the National Treasury Management Agency but, while there is a certain sympathy for its argument that SP fundamentally failed to give credit for assets held within Nama, it is also the case that SP was in many ways simply following the market.

The spread on yields of Irish 10-year bonds and German bunds was already knocking on the door of record levels ahead of the SP move.

More pertinent, at least in the eyes of the markets, were events over the previous 10 days. First, in a move that confirmed the escalating cost of Anglo Irish Bank, the European Commission approved a larger than previously expected bailout of the bank.

Speaking in Asia subsequently, Central Bank governor Patrick Honohan acknowledged that the cost could be up to €25 billion and that rescuing Irish Nationwide Building Society – the other black hole in the domestic banking scene – would take €3.2 billion, roughly 20 per cent more than previously provisioned.

His call for a resolution on the future of Anglo Irish “within weeks” because of the “disproportionate impact on international investors” served to fuel market alarm, pushing the yield spread against German bunds back over the 300-point mark and, it appears, prompting significant intervention by the ECB in support of Irish bonds.

Last week’s auction of short-term paper at lower yields than earlier this month was seen as a plus for Ireland – and the strong cover for the bonds indicated that for now, at least, Ireland is not friendless in the market.

But this is only six- and eight-month money and demand for clarity over the longer term remains as strong as ever. Spreads continued to widen even after the auction.

Tomorrow Anglo Irish is due to release its latest set of results. The interim figures are expected to provide little comfort, with losses likely to exceed the €4.1 billion at the same period last year. In the absence of clarity, we can expect little tolerance in the markets.

It’s not just Anglo (and Irish Nationwide). There is a growing consensus that AIB will not be able to raise the funds necessary to meet its capitalisation requirements, further affecting the ultimate cost of the bailout.

And there remains a strong suspicion that banks that have singularly failed to properly price their development loan books, as evidenced by subsequent Nama valuations, are being similarly unrealistic in addressing the scale of problems within their mortgage and retail lending operations.

Indications that the European Union may yet balk at the proposed restructuring of Anglo into a good bank-bad bank and growing calls for debtors to bear at least some of the burden (most recently in the Financial Times last week) point to the diminishing tolerance further afield for the current drawn-out process – even as the covered banks enter the market to refinance billions in debt.

Only the most extreme commentators are raising the spectre of default but, with Greece in effect out of the market, the yield spreads of the past fortnight show that Ireland is now the next point of attack on Europe’s periphery.

Rather than bemoaning the actions of ratings agencies, the Government would be better advised to focus all its efforts on getting a bottom line figure for the cost of revitalising (or closing) our ailing banks.

Ultimately, with our likely long-term debt exposure, we are not fully the masters of our destiny. It will be the markets, not Standard Poor’s, that will have the final say. Time is not on our side.