Guaranteeing the banks

 
 

Dara Martin discusses the implications of last week’s new legislation designed to shore up the economy.

Intended to restore public confidence in the Irish banking system, while allowing banks access to credit, otherwise frozen by the global credit crunch, emergency legislation passed last week stands to guarantee Irish deposits and debt for the coming two years.

As workers and customers have witnessed previously, powerful banks succumbing to take-overs, or collapsing in the United States and Britain, Taoiseach Brian Cowen and Minister for Finance, Brian Lenihan took affirmative action by proposing a guarantee that could amount to €400 billion.

The proposal was announced shortly after shares in Irish banks tumbled last week. Four experienced their largest fall in 25 years, including a staggering 47 per cent decline in Anglo Irish Bank shares. However, news of a government guarantee had a resounding effect as shares prices of Irish financial firms surged upwards the following day.

The structure of the new agreement evolved from a hastily arranged meeting, and followed several encouraging steps taken by Minister for Finance, Brian Lenihan over the past fortnight to restore confidence among Irish bank account owners. Firstly, he raised the guaranteed deposits from €20,000 to €100,000, before safeguarding the liabilities of the country’s leading financial institutions.

Therefore, if Bank of Ireland, AIB, Anglo Irish Bank, Irish Life & Permanent, Nationwide Building Society or EBS were to go bust, depositors would be compensated for the full amount held in their account.
Foreign-owned Irish banks have also appealed to the government to be included in the guarantee. At the time of going to print, Bank of Scotland (Ireland), Ulster Bank and National Irish Bank have called for discussions with the Minister for Finance, claiming that if they are to be left out, they would stand at a competitive disadvantage.

The Irish scheme acts as a kind of pre-emptive strike whereby the state is potentially rather than actually exposed to liability

Despite assurances from the Minister that this is not simply a bail-out, many taxpayers are concerned that they will have to ‘foot the bill’. Initially the banks will be charged commercial rates for the implementation of the guarantee, however, it is likely that these charges, or at least some of them, will be passed onto customers.

The rough figure of €400 billion amounts to the total liabilities of the institutions, while it is understood that the total assets of the Irish banking system comes to around €500 billion. Although he supported the bill, Fine Gael leader Enda Kenny was adamant to point out that the guarantee is the equivalent of up to €250,000 per taxpayer.

While George Bush struggled to push a $700 billion bail-out through the US Congress, designed to purchase bad debts from struggling financial institutions, Brian Lenihan was assuring members of the Dáil and Irish investors that his proposed legislation was intended to ensure the stability of the financial system.

Unlike the Irish Credit Institutions (Protection) Bill 2008, the American plan involved the definite expenditure of huge sums of money where as the Irish scheme acts as a kind of pre-emptive strike whereby the state is potentially rather than actually exposed to liability.

While Bush’s plan was debated through the House of Representatives and the US Senate, both Democrats and Republicans had to remember that government seats are up for election in November. Therefore congressmen had to decide between putting taxpayers, and essentially voters’ money on the line to bolster the American economy, or reject the bill which many US citizens believed was just a bail-out for Wall Street fat-cats who had made massive losses.

With no general election on the horizon in Ireland, TDs could vote in favour of the bill without fear of losing their seats in the near future even if some taxpayers will be disgruntled by the new legislation despite the fact that there appears to be general consensus in Ireland that this is the right thing to do in the midst of the current global financial crisis. In fact, Labour were the only party to oppose the bill in the Dáil, while it was also passed with an overwhelming majority in the Seanad.

The rest of Europe has now followed the Irish approach With Ireland being the first European country to enter into a recession, it is hardly surprising that the Irish government acted more swiftly that its EU counterparts. Some members of foreign governments, particularly the British Chancellor, Alistair Darling and French Finance Minister, Christine Lagarde, have voiced concerns regarding the Irish guarantee, claiming that it is not in the best interests of competition.

Already large inflows of cash have made their way into Irish bank accounts from foreign depositors since the move was announced. Although other Europeans may not be elated by the latest turn of events, it seems that money in Irish banks will rest easily despite the recession.

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