Despite an €85 billion bail-out for Ireland, the euro zone’s debt crisis is getting worse. Our first article looks at why politicians’ attempts to stem the crisis are failing. Our second examines what a break-up of the euro zone might look like

ONCE again a late Sunday night in Brussels ended with a bail-out for a stricken economy and a set of improvisations to stem the euro zone’s debt crisis. Ireland’s rescue had a similar script to Greece’s, but with a very different outcome.

In May European policymakers trumpeted a €110 billion ($146 billion) bail-out for Greece and the promise of €750 billion in rescue funds for the whole zone. They succeeded, temporarily: yields on Greek government bonds plunged and Europe’s sovereign-debt markets calmed down for several months. On November 28th they tried to repeat the trick, announcing an €85 billion package for Ireland and the outline of the European Stability Mechanism (ESM), a permanent system to deal with debt crises, to come into effect after 2013.

This time markets were not reassured. Irish bond yields fell for a few hours, but were setting new records by the end of November 29th. Contagion intensified: yields on Portuguese, Spanish, Italian and even Belgian bonds jumped (see chart). The gap between these countries’ borrowing costs and Germany’s became wider than at any time since the birth of the single currency. European stockmarkets fell. The euro hit a ten-week low against the dollar.

Europe’s policymakers are crying foul. “The speculation on international financial markets can’t be explained rationally at all,” declared Wolfgang Schäuble, Germany’s finance minister. But it can, and there are three reasons why.

First, investors have good cause to suspect that Ireland’s bail-out has not solved that country’s mess. Second, European rescue funds are not big enough to replicate the Irish rescue should bigger countries get into trouble. Third, it is plain that under the ESM defaults will no longer be taboo. So it makes sense to demand higher yields on some euro-zone governments’ debt.

Start with Ireland. Investors worry that the country’s politicians will be unable to impose the fiscal austerity they promise. But they worry too that the promise might be kept—and that the Irish economy will not grow fast enough to service the state’s huge prospective debt load. The average interest rate on the rescue funds, 5.8%, a lot higher than Ireland’s likely nominal growth rate, adds to this concern.

Ireland’s problems stem largely from its insolvent banks. With an eye on future rescues, markets were especially concerned about the treatment of these banks’ senior bondholders. The Irish government (and the IMF) wanted these creditors to take a hit. But European officials insisted not, fearing catastrophic effects on the funding costs of banks elsewhere. Instead they preferred to leave Ireland with a bigger burden but senior creditors whole.

Seeing the lack of cash for future rescues, investors doubt this precedent will be maintained. By most calculations the European Financial Stability Facility, the main temporary pot set up in May, could lend at most €250 billion and still maintain a AAA credit rating. Even with the extra IMF money, there may not be enough to bail out Spain and its banks. Worse, the euro zone’s politicians gave no hint of how big the ESM would be. Some officials at the European Commission are said to want the funds doubled, but Mr Schäuble quickly poured cold water on the idea.

Germany has made some concessions over the ESM. Originally it demanded that bondholders should take a hit whenever a country received European rescue funds. Under the ESM countries will have access to rescue money without obliging bondholders to take a write-down, as long as the IMF, the European Central Bank (ECB) and the commission all conclude the supplicants’ debt is sustainable, and all euro-zone finance ministers agree. If not, insolvent countries must negotiate a restructuring. To make this easier, new euro-zone government bonds will have “collective-action clauses” from 2013. Over time these bonds’ share of the stock will increase.

What if a country goes bust sooner? Some lawyers note that nothing in the outline of the ESM prevents the restructuring of debt issued before 2013. Lee Buchheit of Cleary, Gottlieb, Steen & Hamilton in New York argues that countries could change their laws on domestic bonds to impose collective-action clauses retroactively.

All this makes restructuring more likely. If default by euro-zone governments is no longer inconceivable, investors will change their view of the safe level of government debt. In emerging economies public debt of more than 40% of GDP is considered dangerous. That is less than half the ratio in much of the euro zone.

The trouble is that if bond yields stay high, Europe’s rescue strategy is doomed. Weaker countries’ debt burdens will need to be eased. Direct fiscal transfers from stronger countries (such as Germany) and common EU bonds seem to be ruled out, so only one muddle-through option remains: the ECB. The central bank has already supported the zone’s dodgy banks with its liquidity facilities; and it created a scheme to buy sovereign bonds to calm markets back in May. The hawkish ECB likes neither and has been keen to stop.

That purism may have to come to an end. On November 30th Jean-Claude Trichet, the ECB’s president, hinted that the central bank might resume its bond-buying. As The Economist went to press, expectations were rising that the ECB would announce a delay in its exit from emergency liquidity measures on December 2nd. By propping up the region’s weaker banks and buying its more indebted economies’ sovereign debt, the ECB could engineer a back-door bail-out of the euro zone’s periphery. It won’t be pretty, but it could stave off some much uglier alternatives.