Ireland's Solution: Better Than a Bailout?

Examining bank nationalization abroad as blueprint for solving US crisis.

Minyanville Staff
Sep 30, 2008 3:09 pm

Earlier today, the Irish government attempted to stave off financial crisis by guaranteeing all deposits and certain debts in 6 Irish banks. The full government statement can be found here.

The move comes 2 weeks after a US-style FDIC deposit protection limit of €100,000 was introduced and follows Monday's record losses for Irish financial stocks.

The plan, which guarantees an estimated €400 billion ($567 billion) of liabilities, covers retail, commercial and inter-bank deposits as well as covered bonds, senior debt and dated subordinated debt.

This proposal has been offered by some as a potential alternative to the Paulson Bailout Bill, now stalled in Washington D.C. Below, several Minyanville professors take a look at the Irish bank guarantee and consider whether something similar should take place in the U.S. to stem the financial crisis here.

Ireland guarantees bank deposits, borrowings
Tuesday September 30, 10:07 am ET
By Shawn Pogatchnik, Associated Press Writer

Ireland's bank stocks surge as gov't guarantees deposits, borrowings of 6 Irish banks

DUBLIN, Ireland (AP) -- Shares of Irish banks surged Tuesday after the government issued a sweeping guarantee to insure deposits and bank borrowings against a potential collapse.
The government unveiled an unlimited guarantee on deposits at six banks one day after the Irish Stock Exchange suffered its greatest fall in history and rumors spread that millionaire depositors were withdrawing their savings from Irish institutions.

Investors embraced the government's dramatic intervention and Irish bank shares jumped, reclaiming most of Monday's losses.

Finance Minister Brian Lenihan said all deposits in Ireland's six domestically owned banks would be taxpayer-guaranteed if any failed. The guarantee does not apply to foreign-owned banks in Ireland, because they are subject to their own parent nation's protections.

The covered Irish institutions are Allied Irish Banks, Bank of Ireland, Anglo-Irish Bank Corp., Irish Life & Permanent, Irish Nationwide Building Society and the Educational Building Society. State protection is to run for at least two years.

Crucially, the government guarantee -- which followed Monday's record-setting 12.7 percent drop on the Irish Stock Exchange -- also underwrites a bank's own debts to other institutions worldwide. If a protected bank cannot pay its creditors, the Irish taxpayer would cover the bill.

Lenihan estimated that the government had taken on a potential worst-case liability of 400 billion euros ($575 billion). That's double the country's annual gross domestic product and nine times its national debt.

But Lenihan said he didn't expect the state to have to pay out a penny. He said Irish banks needed immediate support to strengthen their ability to borrow working capital from other banks.

He called on leaders across the 27-nation European Union to follow the Irish example -- and criticized American efforts as too slow.

"I do not see any hazard or exposure to the taxpayer from the decision I have arrived at," Lenihan told a press conference.

"Were liquidity to dry up in the Irish banking system in the weeks ahead, the inevitable result would be economic catastrophe for this country," he said. "We are a small, exposed economy -- more globally exposed than any (other) economy in the EU. For us not to have a viable banking system would paralyze trade in this country and reduce us to a perilous position in the marketplace."

Lenihan said the covered banks must pay a levy to the government, and those conditions would be determined in consultation with the Central Bank of Ireland.

In Brussels, EU competition spokesman Jonathan Todd said the Irish must explain how their insurance scheme for homegrown banks would work. He said the EU was obliged to investigate whether it creates an unfair edge versus foreign banks doing business in Ireland, including Dutch-owned Rabobank, Danish-owned National Irish Bank and Belgian-owned Irish Intercontinental Bank.

Todd said Irish authorities should charge banks "a commercial rate." He said competition officials would "assess whether any distortion of competition was disproportionate to the problem that the measure was meant to address."

Lenihan faulted the U.S. government for failing to intervene directly earlier this month to prevent the collapse of Lehman Brothers Holdings Inc., a key Wall Street domino to fall.