In a decision that many would regret, the Government at the time issued an unlimited guarantee for Irish banks, five of which were nationalised. It transpired that the liabilities were more than triple Ireland's annual gross domestic product.
Debt-crippled, Ireland then had to plead for a bailout from the European Union (EU) and International Monetary Fund (IMF), which stumped up €85 billion ($130 billion) in return for spending cuts and tax increases. Consumers that had spent freely tightened their belts by several notches as they struggled with homes that were a fraction of their pre-crisis value.
Ireland today is littered with "ghost estates" that were built during the party years but remain unoccupied, save for a few luckless families who bought homes at the wrong time and are now nursing negative equity.
A telling example of the problem is a 5ha development of 63 empty houses near Tullow in County Carlow whose developer went bankrupt. The homes had initially been priced at €200,000 apiece, and their construction was allowed on condition that they were occupied by people aged over 55. At an auction last week, an entrepreneur bought the houses at €10,000 each after the authorities lifted the age restriction and gave him permission to build a further 58 homes if the market recovers.
The glut is epic in the hotel industry. The number of hotel beds doubled to 51,000 between 1999 and 2008 as developers exploited a provision that allowed them to build a hotel and write off the capital expense against tax. They spent €5.2 billion, of which €4.1 billion was borrowed. Today, one in six Irish hotel rooms is under the direct control of a bank.
"There are 12 hotels in Holland with five-star status. In Ireland, a country with a quarter of the population, there are 41," the Sunday Business Post noted last weekend.
Right now, 14.9 per cent of the workforce are jobless or have only part-time or casual work, the highest rate since 1994, when Ireland began the boom that led it to be dubbed the Celtic Tiger. This figure does not include the 250,000 people, out of the Republic of Ireland's 4.5 million population, who have emigrated since the start of the recession.
Stocks remain in the doldrums: in February 2007, the ISEQ benchmark of leading publicly trading Irish companies reached a peak of 10,041 points. Last Friday, it closed at 3184.
Despite this, there are some encouraging signs of hope, especially in agriculture - the sector that during the boom years was literally snubbed as the country cousin to the slicker financial industry.
Foreign sales of dairy products, meat, seafood and drinks last year reached a record high of €8.85 billion, according to the state agency Bord Bia. They helped the economy expand for the first time since 2007. GDP expanded by 1.4 per cent in 2011, twice the Government's prior estimate of 0.7.
According to a think-tank, the Economic and Social Research Institute (ESRI), growth this year should be 0.6 per cent, rising to 2.2 per cent in 2013 provided the eurozone - the biggest destination for Irish exports - starts to expand.
That latter figure is crucial. Ireland has to hit 2.2 per cent growth annually over three years to get its deficit below the EU's official limit of 3 per cent by 2016 so it can free itself of the IMF-EU tutelage. Right now it is on track to be within the 8.6 per cent of GDP target for 2012 set by its lenders.
Ireland is starting to reap the rewards of a reputation of upholding its promises to the EU and IMF, and its standing with investors was strengthened in May when it ratified the eurozone's fiscal treaty in a high-risk referendum.
On July 5, it took its first dip into private capital markets since the bustup, raising €500 million in three-month bills. The issue was sold at a yield of 1.8 per cent and was 2.8 times oversubscribed - an encouraging endorsement compared with Portugal and Greece, which remain locked out of the bond markets.
Even so, a return to 10-year bonds, a benchmark of investor faith, may hinge on the finalisation of a deal announced at the EU summit in Brussels last month. EU leaders agreed countries which are "well behaving", in the words of EU President Herman Van Rampuy, may offload some bank debt on to the EU's new bailout fund to help reduce sovereign debt to sustainable levels.
The hope in Dublin is that a big chunk of Ireland's €64 billion bank debt could be dumped this way. But exactly how much is the question. It could take months before Finance Ministers determine this, and the outcome may be linked to progress towards a European banking union.
"The details have to be worked out... [but] if the principle is adopted, that's big news," said Philip Lane, a professor of international macro-economics at Trinity College, Dublin.
Even so, Ireland is looking at a lost decade.
"It will take until about 2017 before Ireland is back to the level of, say, the pre-crisis period of 2007," Lane predicted.
