Irish government throws pebble into the stream

It’s beyond general comment so I won’t even try. But can anybody tell me why in this turmoil the US Congress has to rise for the two days of the Jewish New Year?

Irish government guarantees for deposits seems to have lifted stocks in Dublin for the moment but it can only be a pebble in the stream. Nor are all Irish Banks Irish as the Irish Times reminds us.

“The measure does not extend to deposits or debts in National Irish Nank, ACC, Rabobank or Ulster Bank which are subsidiaries of large international banks.”

For instance, Ulster Bank is owned by the giant Royal Bank of Scotland and National, the Northern Bank in NI is owned by Danske Bank which has netted out of Lehman’s at a cost of a mere $100 million and appears in no worse a position than any other. Meanwhile, Anatole cries: “We’re all doomed”. For some the burden of the bail-out on taxpayers could be too much. For others, the pure marketeers, it’s the wrong thing to do anyway… Meanwhile, it’s headless chickens time down on the money farm.

Update on cross border, cross channel complications. From the BBC story “The department said that the scheme would cover all UK branches of the financial institutions, but that negotiations were under way with the British authorities on safeguards that might be provided to any of the six banks’ subsidiary companies in the UK.” Just to confuse the issue, ThisisMoney reports that “full compensation will not stretch to UK customers of Allied Irish Bank, as it says its UK branches are separately authorised to its Irish parent bank when it comes to compensation. These savings are therefore only covered up to the UK limit of £35,000 per individual. The move will increase pressure on Alistair Darling to increase the UK limit to £50,000 before the end of the year as he hinted during the summer.” “This is by any standards an extraordinary development that may result in an exposure of as much as €400bn for the Irish taxpayer,” said Joan Burton of the Irish Labour party.

  • Mack

    David McWilliams has been pushing for this in his Newspaper columns (also on his blog).

    http://www.davidmcwilliams.ie/2008/09/28/state-guarantees-can-avert-depression

    There is €500 Billion Euro on deposit in Irish banks. This is seems very high to me, so presumably a portion of that money is held in business deposits for MNCs – could be disastrous if they lost confidence in the safety of their business accounts!

  • Harry Flashman

    Interesting, I wonder how European law would look at the Irish government protecting the deposits held in Ireland with Irish owned banks but not protecting deposits held in Ireland but in banks owned by other EU nations, it would seem to be giving unfair advantage to the Irish owned institutions and probably in breach of EU trade laws.

    Furthermore, what about deposits held in Irish owned banks in Northern Ireland? Is my modest account in the Bank of Ireland in Derry guaranteed by the Irish government or the UK?

    This crisis is going to show up the real attitudes Ireland has to European and Irish unity, I suspect in the heel of the hunt the Irish will do whatever is best for their own national self interest and rightly so.

  • manichaeism

    “This crisis is going to show up the real attitudes Ireland has to European and Irish unity”

    Maybe the Irish government should guaranteee every bank in Europe!

    Come on, what the Irish government is doing is risky enough as it is. They have to limit it in some way.

  • George Burns

    Brian,
    it has not only pledged to guarantee deposits, it will also honour all inter-bank loans. This is 500 billion.

    This is either a stroke of genius or madness. We’ll soon find out.

  • Mack

    Harry Flashman – your modest deposit in the north is covered by the UK deposit protection scheme (up to £35k). The foreign owned banks operating in the south are either covered by deposit protection schemes in their own country (e.g. Rabo/ACC, Northern Rock, National Irish Bank – the irony!) if that is the arrangement they have chosen. Or up to €100k if covered under the Irish deposit protection scheme.

    The Irish government is acting to protect the economy (and the banking / building interests of the Fianna Fail base) – the impact on future prospects for Irish unity doesn’t enter into the equation at all. It’s just not on the agenda or in the mainstream consiousness…

    Some other forums where southerners are discussing this..

    http://www.thepropertypin.com/viewforum.php?f=19
    http://www.thepropertypin.com/viewforum.php?f=4

    http://www.askaboutmoney.com/forumdisplay.php?f=70

  • ulsterfan

    There is a hint of illegality about this move and the EC have already said they will look into the matter.
    They have moved quickly.
    What is to stop a run on all UK Banks with funds finding a safe haven in Ireland. The Government may regret this action.
    They are taking a sledge hammer to crack a nut and at the same time a few people have made a lot of money with the sudden increase in value of Irish Bank shares.

  • Longterm, State ownership of banks is not a desirable solution. If it happens, it should only be a temporary phenomenon. What is needed is something similar to factoring/accounts receivable financing so that financial institutions can insure against the risk of loan-defaults just as businesses can currently sell their debts to financial institutions for 98% of the cost, with the financial institutions having recourse to the bad-debtors. Currently factoring is not available for loan defaults owed to financial institutions. Regulations are needed to require such insurance to be taken out. If necessary it should – at least at first – be a State-owned insurance-scheme. That way the taxpayer will be in better shape to payout in the future if this happens again. As a moderate liberal, I dislike the spectacle of State-bailouts of financial instutions, and hope one day that the insurance-companies can bail them out instead, but we are not presently in a position where that is feasible. In that context I support what govts around the world are doing in guaranteeing deposits, though I am uncomfortable with nationalisations of banks, and I firmly believed that those nationalised should be privatised again once the measures I have outlined are in place and the banks viable as going entities.

  • George

    Ulsterfan,
    There is a hint of illegality about this move and the EC have already said they will look into the matter.

    Well the EC allowed Germany to give what amounts to state aid to Hypobank in the last 48 hours so don’t see how they can scuttle this move now. What’s good for the goose and all that.

    What is to stop a run on all UK Banks with funds finding a safe haven in Ireland. The Government may regret this action.

    Which government will regret this? Certainly not the Irish one if money flows into the country rather than out of it.

    A call had to be made and it seems the Irish government has decided to jettison the lifeboats to ensure that everyone does their utmost to keep Ireland Inc. afloat. Interesting stuff.

    Harry,
    This crisis is going to show up the real attitudes Ireland has to European and Irish unity, I suspect in the heel of the hunt the Irish will do whatever is best for their own national self interest and rightly so.

    Indeed, I can’t see the EU stepping in here. In fact, I think it is more likely that other countries will follow suit. How long before the UK and others have to do something similar if things really are as bad as everyone says they are?

  • smcgiff

    The banking system relies on a nod and a wink mentality. Scary but true. The money in your pocket has an intrinsic value far less than its stated value. Likewise banks lend out multiples of the money they hold on deposit as loans. Everybody knows this. It’s all about a confidence in not all savers looking for their money back at any one time.

    What the Irish government has done is give confidence back to the banking system. And it has done it for a mere pittance. It has simply given its word. Contrast this to what is being proposed in the US – 700 Billion that will be used to shore up Wall st by buying effectively junk loan books (and rightly so in my opinion – grating and all as it is), and the UK where they’ve nationalised several banks.

    There’s a lot greater likelihood of the UK taxpayer being left with a sow’s ear than the Irish taxpayer – simply because the Irish government have given the wink and a nod to the Irish banking system.

    The one thing that has to happen is increased regulation against the likes of sub-prime lending with the new funds.

    Now that Irish banks will be able to borrow from other banks it will be able to lend money and from there the recovery starts.
    Cue other governments following suit.

  • John East Belfast

    This is a risky move because what it does is address only one side of the current bank problem.

    At the minute the Banks have a problem with Liquidity as well as Capital.

    The problem with Liquidity is basically those who have no real Deposit base of their own have to go to the wholesale Bank market and borrow the money they have loaned – in excess of their deposit base – from other banks in order to balance their books. As we know that market has all but dried up.

    Therefore this move will help liquidity in two ways.
    First it will help with an inflow of cash deposits – people will see Irish Banks as an oasis for their money.
    Secondly and, I believe more importantly, it will stop existing Depositors pulling their money out of Irish Banks which I think would have been very likley today. A lot of Irish banks are heavily into the property market and in today’s climate such banks are not a good place to have your money.

    However it will not address the Capital problem – ie quite frankly a lot of Irish banks are sitting with Bad Loans on their books which they havent provided for and written off against their Profit & Loss Account with a resultant depletion of their Capital. When the latter starts to happen these banks will still fail and the Irish Government will be left to pick up the bill for the extra and existing Depositors cash they burned just before failure.

  • smcgiff

    JEB,

    Once you take away the liquidity problem you remove the worst of the crisis. I, and presumably the Irish government, believe the Irish banks are sound in other regards. Yes, they are exposed to developers, but on the whole they would not be enough to make the banks fail.

  • John East Belfast

    smcgiff

    Let’s hope you are right but I am not so sure.

    The main reason for this move was to stop people pulling their money out of Irish Banks which would have been catastrophic for the system.

    This is not an act of charity by the ROI Govt nor a smart move to pull in money seeking for a safe haven.
    It was an act of desperation and was announced first thing before the markets opened.

    There are an awful lot of land bank deals both in Ireland and elsewhere on these Bank’s books and in a climate when you could get Deposits of £10m and then lend out £100m you can easily wipe out a bank’s capital base once fore closures start to happen.

    The Celtic Tiger could be propelled back 30 years if this all goes bad.

  • ulsterfan

    smcgiff
    There is a lot more to confidence in the banking system than a nod and a wink.
    If things go pear shape for Irish Banks, and for one moment I do not think this will happen, perhaps the governments guarantee will be nothing more than a nod and a wink.
    That never replenished empty coffers.
    Governments were always good at promises so why should anything be different.

  • smcgiff

    ‘Governments were always good at promises so why should anything be different.’

    That’s the beauty of it. If things go pear shaped (not that I think they will) the Irish Government couldn’t w/o €500 billion i.e. €119k per man woman and child anyway, but it saying it would do is enough to give confidence hence the revesals of yesterdays losses. If that’s not a nod and a wink I don’t know what is! 🙂

    ‘The Celtic Tiger could be propelled back 30 years if this all goes bad.’

    I agree with you, JEB, but can’t see that happening. I also agree that it wasn’t a Machiavellian plot to steal UK wealth (that would just be an added bonus! ;-> )

  • Comrade Stalin

    Brian, it’s a bit crazy that there are a total of three threads on this very same subject. It harms the coherency of the conversation when people have to read and contribute similar things in three different places.

    ulsterfan:

    What is to stop a run on all UK Banks with funds finding a safe haven in Ireland. The Government may regret this action.

    I don’t think so. The whole problem here is the herd mentality and that’s what this guarantee addresses.

    By providing a guarantee to the banks and encouraging people to deposit their money there, the banks are increasingly underpinned with more liquid assets and less likely to experience a run, which means in turn that the government is less likely to have to get involved. More deposits in the banks also means more profit which in turn strengthens those institutions.

    By adding a promise to pay out, the government reduces the likelihood that it will actually have to pay out.

    Yes, I think this will mean that other governments will have to introduce similar measures lest people withdraw their cash and move it to Ireland. I can’t see this being such a significant problem; UK depositors holding up to 50K already (or will very soon) enjoy the same guarantees as Irish depositors. It’s a question of what proportion of savings in the UK are deposits greater than that number. Not many, I’ll wager, giving that everyone’s been blowing their money on their house payments.

  • picador

    What will happen at the end of the two years?

  • Comrade Stalin

    I think they’re banking on the storm being over by then.