The bad news, or the bad news?: Finance Minister Brian Lenihan has seen Ireland become a riskier investment proposition than Spain and Portugal

It was a year when every cliché seemed apposite: the economy's foundations were indeed built on sand, the property market was really a house of cards and brazen bankers were the ones who fretted if developers owed a ton of money and cut off credit to those who owed little.

But, as pressures on the government finances here continue to grow, there was no disguising that Ireland was moving back to an era of large budget deficits. Another tenet of the boom years, that Ireland was a low debt state, evaporated in weeks, as the demands on the public purse lengthened alarmingly.

The bill for soaring unemployment, and the still-uncounted cost of rescuing the Irish banks, will have to be paid in huge amounts of extra borrowing from abroad.

It used to be said that Ireland's cushion would be the low-debt pile it carried going into a recession. A country that obeyed the eurozone rules, keeping below the 3% annual deficit ceiling, and that strove, over several years, to run a balanced budget would benefit over time in paying a lot less for the money it borrowed from abroad. Living standards would rise. But the collapse from boom to slump here has been spectacular.

For Ireland, success is measured in paying an interest rate on the money it borrows abroad that is the same or a little above the rate that Germany, Europe's standard bearer, pays to service its government debt. Long-term interest rates that countries pay to overseas lenders can rise and fall, but the significant measure is the premium paid above the German interest rate.

The narrower the gap, or the so-called spread, that Ireland has to pay in interest rates compared with relevant German bond rates is a sign that foreigners trust in a country's credit-worthiness. The more debt paper that Ireland issues, as it mortgages a larger and larger proportion of future tax revenues, the higher the premium it must usually pay to persuade foreign governments to buy the bonds. Countries can move up and down the international league table, as measured by the interest rate premium they must pay.

Unfortunately, Ireland has tumbled down the table this year, and by last week, the premium foreigners demanded for holding Irish debt paper hit its highest level since 1994, when Ireland was emerging from the currency crisis, according to Alan McQuaid, chief economist at Bloxham Stockbrokers.

Several years ago, Ireland's low levels of sovereign debt meant that markets demanded little more than the interest rate that Germany was paying. Briefly, Ireland even paid a lower rate, or in the jargon of the sovereign bond markets, "traded through" the equivalent German benchmark bond yield or interest rate. The state was effectively being rewarded for issuing less bond debt, with a lower interest rate.

At the end of last year, Ireland had a government debt load of €47bn, which, when measured as a proportion of annual GDP, was effectively the lowest in Europe. The interest bill for servicing the debt, at an average interest rate of about 4.5%, cost the state about €1.61bn last year.

By January, long-term interest rates had fallen, and the Treasury Management Agency, the manager of Ireland's debt, paid an average interest rate to service the government debt pile of about 4.24%, compared with the 3.99% rate that Germany was paying. That left a gap, or spread, between the two rates at a still respectably small 0.25%, or 25 basis points. But the gap started to widen out, and shot up dramatically, from late summer.

By July, the premium the state had to pay almost doubled to a spread of 41 basis points, or 0.41% more than Germany was paying at the time to service its debt. That was a sign that lenders abroad were starting to suspect that the Irish economy was heading for tough times. Even a small increase in the spread, or premium, can cost the state a lot of money in higher interest rates.

It didn't stop there. In a sure sign that overseas investors and governments had a handle, many months ago, even as the Irish bankers continued to deny publicly the seriousness of the unfolding crisis, the gap between Irish sovereign debt and that of Germany widened out further.

By late September, when the Wall Street investment banks were failing, and the government here announced an unprecedented guarantee for the Dublin-headquartered banks, the spread of Irish debt over the equivalent German benchmark bond widened to 46 basis points. After the early budget in October, the spread widened to 66 basis points, a huge premium for a country sharing the same currency. Again, international investors were anticipating a worsening economy and the increased risk that a major bank here would collapse. Last month, the spread widened to 83 basis points. Last week, after the government announced the first stage of pumping public money to keep the banks afloat, the premium reached 131 basis points, meaning that Ireland was paying an interest rate of 4.24%, or a huge 1.31% above the 2.93% interest rate that Germany need only pay to borrow money from abroad.

Worse, international investors and overseas governments now see Ireland as riskier than Spain or Portugal, two former high-growth countries that, like Ireland, have seen their property markets implode.

The rate Ireland was paying on its 10-year bond last week, of 4.24%, compares with the 3.78% the Spanish and the 3.91% the Portuguese needed to pay last week to issue more debt. Both countries have to pay significantly more than the German 10-year bond interest rate of 2.93%, but still pay a lot less than Ireland.

The state faces the prospect of two debt burdens: its citizens, after overpaying for property, carry a huge amount of private, mostly mortgage, debt. Private indebtedness reached about 250% of GNP last year, equivalent to a private debt pile of over €400bn. Now, public debt is also soaring. Rising levels of sovereign debt will require more taxation, more money borrowed abroad to plug annual deficits and, ultimately, much lower living standards for citizens in the years ahead.

The NTMA could boast in its 2007 report, published last summer, that the Irish economy had been transformed in recent decades. Ireland used to carry a public debt ratio, one of the highest in Europe, at more than 100% of GNP. "Now at 23.3%, it is one of the lowest. In 1990, 70% of the amount raised in income tax was needed to service the annual cost of the national debt. By 2007 it took just 12%," it wrote.

Unfortunately, public debt is rising to levels not seen for many years.

In the budget, the government forecast that government debt would rise from a quarter of GDP, or around €47bn at the end of last year, to €67bn at the end of this year. It forecast it would rise next year to 43%, equivalent to a debt pile of €79bn, before reaching more than 47% of GDP, or €89bn in 2010. In 2011, it said the debt ratio would reach almost 48%, representing a debt pile of €92.3bn. The problem with the government's forecasts, as with its unemployment predictions, is that most economists say they are too optimistic.

By demanding a huge premium for holding Irish government debt, the sovereign debt markets appear to agree.