Sunday, November 21, 2010

Irish State Bank Guarantee and the arrival of the IMF in Ireland

Office of the Taoiseach, Dublin - - In this building on Monday, Sept 29, 2008, Taoiseach Brian Cowen made the most cataclysmic economic decision in the history of the State.

The Financial Times said the State bank guarantee turned the State and the banks into one entity from the viewpoint of financial markets and there is a direct link between the issue of a blanket guarantee on Sept, 30, 2008 and the arrival of IMF officials in Dublin m on Nov 18, 2010.

The English writer William Somerset Maugham (1874-1965) said: “It's no good crying over spilt milk, because all the forces of the universe were bent on spilling it.” Nevertheless, it's important to recognise the enormous consequences of the guarantee of existing bank debt in the State guarantee that was issued on Sept 30, 2008.

Ireland and Denmark were the only countries during the global financial crisis to guarantee existing bank debt and on the first day of the Irish guarantee, Minister for Finance Brian Lenihan said: “We are not in the business here of bailing-out banks.”

Advisers Merrill Lynch had warned that an extensive guarantee of liabilities at the State’s main banks could “hit the national rating” and allow poorer banks to continue in operation. However, they advised the minister against a policy of liquidation or letting a bank become insolvent, saying “this was the worst thing that could be done” as it would accelerate trouble for all other institutions. Merrill Lynch proposed an alternative to the guarantee scheme in the form of a “secured lending scheme” for banks whereby commercial property could be exchanged for Government bonds or cash.

There were exactly four months between the collapse of US investment bank Lehman Brothers and the announcement in mid-January 2009 that Anglo Irish Bank would be nationalised.

Strauss-Kahn referred to "one big bank" but there was also the recklessly run Irish Nationwide Building Society (INBS) and the bail-out of the two institutions will cost at least €40bn -- more than 25% of annual gross domestic product. INBS had become a commercial property lender with almost half its commercial loan book for property in the London region.

Minister Lenihan had declared the bank guarantee “the cheapest bailout in the world so far,” but it prevented a restructuring or orderly closure of two insolvent institutions and left taxpayers with the huge bill.

The period post-Lehman period was marked by the collapse of Icelandic banks and several rescues across Europe. Ireland would not have been an outlier in restructuring its banks and imposing losses on bondholders at that time.

Some months later, the Obama administration restructured General Motors in that manner.

Prof. Morgan Kelly of University College Dublin and Brendan Keenan, Group Business Editor of Independent Newspapers on Sept 30, 2008, the day the guarantee took effect. Kelly in a stunning tour de force, accurately presents the enfeebled state of Irish banking:

On October 02, 2008, Patrick Neary, the chief executive of the Financial Regulator appeared on RTÉ's Prime Time television programme, and in possibly the most bizarre performance by a public official on Irish television, since its launch in 1961, said that bad lending by Irish banks had nothing to do with the then international crisis which was all about liquidity. He said the banks had plenty of capital to absorb any losses on property loans and he did not believe that over-exposure to the property market was a weakness of the Irish banking sector.