Ireland’s guarantee: how does the rest of Europe respond?

Slugger contributors grasped the implications straight away, you clever lot. While Ireland has won admiration from savers and investors for jumping the gun with its bold guarantee plan, in the financial markets and political comment, it took a while – a few hours at least – for the penny (or rather the cent) to drop. Ireland is setting the pace and other countries are worried about the destabilising effect of the Irish move. On the whole opinion seems to be settling on treating Ireland as a special case. But the EU institutions may not be content to leave it there, as Slugger contributors anticipated and as John Murray Brown reports in the FT. “Irish solution is not an answer EU wants. It is not so much the proverbial Irish solution to an Irish problem as an Irish solution to what is a global problem”. Dublin is posing big questions for the rest of Europe, and a summit of the big players is planned for Saturday. Might Ireland be instructed to go back on the guarantee on EU competition grounds? Surely not, if other countries do something similar. In the heel of the hunt, the high politics of this are simple. Any attempt to punish Ireland seriously with a huge fine or some such would put paid to Ireland’s strained love affair with Europe. They could say goodbye to any hope of ratifying the Lisbon Treaty. That’s a crisis Europe could do without, now more than ever.

The Irish precedent puts pressure on Britain to match Ireland if the eventual American bailout doesn’t do the trick quickly. Gordon Brown and the Bank of England are operating with typical caution on a case-by-case basis, with the survival of the Lloyds TBS take-over of HBos providing the acid test. So far the line seems to be holding.

Adds As we expected the EU Commission is now “in close contact” with the Irish government; the French are thinking of following suit and British banks are “seeking urgent clarification” from the British government about what the Irish guarantees means for them. On the BBC Radio 4 ‘s World at One Charlie McCreevy, Ireland’s EU Commissioner defended the Irish move, saying it wasn’t made lightly and created a level playing field with Britain, after Irish savers had moved into Northern Rock after it had been nationalised.

Adds 2 Only a week ago, I thought the great advocate of state intervention Will Hutton was overdoing it. Now he seems very wise with his proposal for mortgage securities, a European banking regime and his slashing critique of Cameron’s regulatory plan. And what possible relevance has a European referendum to anything? Charlie McCreevy’s and Viviane Reding’s outline of a European regulatory regime suggests that Ireland will not be singled out for censure.

  • Harry Flashman

    Just for the record Brian can I point out that the first clever slugger to point out the EU law angle on this story did not do so in either of the two posts you cite above but on the earlier “stone in the stream” post, and the slugger in question was none other than much maligned, cantankerous old H. Flashman esq.

    Credit where it’s due I always think.

  • Suilven

    Some interesting stats on the magnitude and cost of this guarantee here:

    http://ftalphaville.ft.com/blog/2008/10/01/16545/irelands-gamble

  • It was Sammy Mc Nally what done it

    Difficult times like these you could do worse than turn to the immortal Ulster Scots words of guidance from Star Trek – Ye canna change the laws of the market capn – if yer gayin doon yer gayin doon.

  • George

    Some good comments in there Suilven, especially the all-in poker analogy and the one pointing out that Ireland is in the euro so doesn’t have to worry about an immediate run on its currency.

    I have to say I find this move by the Irish government awe-inspiring in a gut-wrenching rollercoaster kind of way. We’re on it now and there’s no way to get off. We are all-in.

  • Wilde Rover

    So when the banks make money it’s their money, and when the banks lose money is the loss of the taxpayer.

    That’s a great scam. Where do I sign up?

  • smcgiff

    ‘So when the banks make money it’s their money, and when the banks lose money is the loss of the taxpayer.

    That’s a great scam. Where do I sign up? ‘

    Not only COULD this move not cost the tax payer a single euro, it could potentially benefit.

    When the Irish banks now look for credit from International sources (and they must) they will be paying AAA credit rates thanks to the Irish government guarantee. The Differnce (as yet to be defined) between the AAA rate and the rate prior to the Irish Government intervention is to be paid to the Irish Government.

    However, in Ireland and the UK the banks need to have their shorts pulled down and a good spanking administered. Wait till the market settles down and we should see heavy penalties applied to the banks. Well, if I was the Finance Minister I would.

  • It was Sammy Mc Nally what done it

    Ye canna feck the market.

    If you have a good credit rating – the governments – and you take on a bad credit rating – the banks – then the governement credit rating (for bonds) – will suffer – Capn smcgiff.

  • smcgiff

    ‘If you have a good credit rating – the governments – and you take on a bad credit rating – the banks – then the governement credit rating (for bonds) – will suffer – Capn smcgiff. ‘

    An increase of a few basis points – The Irish goverment (and now, de facto, Irish banks) still has an AAA credit rating.

    Feck, we can always throw the state pension fund at it! 🙂

  • susan

    Well spotted and well said, much maligned, cantankerous old H. Flashman esq.

  • Suilven

    EU Commissioner not happy, it appears

    “EU Competition Commissioner Neelie Kroes is still awaiting formal notification from Dublin but made clear her displeasure.

    Without directly naming Ireland, she commented: ‘I would like to plead with national governments today not to act unilaterally but rather to continue their practice of consulting the Commission when they are confronted with problems that may require state aid to the banking sector.

    ‘When Europe was confronted with a banking crisis in the 1930s, governments decided to go national, to retreat from the European markets and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice.’

    Behind the scenes, officials voiced surprise that there had been no prior consultation with Brussels especially considering that any deal stands or falls on EU rules.

    Mr Brown is also said to be angry at Dublin’s failure to consult – and final Commission approval of such a sweeping state guarantee to six major banks is far from certain.

    ‘We’re still waiting to be notified formally about the details, and then we’ll see,’ said one Commission official.”

  • Ulsters my homeland

    …..am I the only one waiting on Gerry Adams coming up with an audacious Marxist plan to rescue the Irish banks? “To infinity and beyond!”

  • smcgiff

    ‘Mr Brown is also said to be angry at Dublin’s failure to consult – and final Commission approval of such a sweeping state guarantee to six major banks is far from certain.’

    Yeah right, and Brown consulted the EU before he went bank shopping?

  • Ulsters my homeland

    Brown was given restrictions over Northern rock.

  • smcgiff

    ‘Brown was given restrictions over Northern rock.’

    Don’t know what they were to be honest. But, on one hand we’ve the UK actually nationalising banks, but a guarantee to do the same is causing ructions?!?

  • Suilven

    “But, on one hand we’ve the UK actually nationalising banks, but a guarantee to do the same is causing ructions?!?”

    Yes, because Northern Rock & Bradford and Bingley are essentially in run-off – their existing commitments, whether they be mortgages, insurance, whatever – are to be honoured, but basically they are not open for new business. Very different to the 6 Irish banks which are still going concerns.

  • George

    Suilven,
    but basically they are not open for new business

    Tell that to all the Irish investors who moved their money into Northern Rock after it was nationalised because of the 100-per-cent guarantee.

  • Alan

    EU Commission and Bradford and Bingley

    http://www.guardian.co.uk/business/2008/oct/01/bradfordbingley.creditcrunch

    Deposits and Branches are being sold to Santander

  • ArmaniSocialists?

    From the Sinn Fein website it says that speaking last night, after having a cursory look over the Credit Institutions (Financial Support) Bill, Sinn Féin Economy Spokesperson Arthur Morgan TD said it is unlikely that Sinn Féin Deputies will oppose the Bill.

  • Ulsters my homeland

    vote Sinn fein, we’ll fix it! “To infinity and beyond”

  • dear me dear me

    What we are witnessing is the complete collapse of neo-liberal economic orthodoxy.What say you Ulsters my homeland.When i was feeding elenwee her nuts today i made the same statement to her and she replied emphatically BAAAAA BAAAAAAA.

  • Let’s be clear here. This is one of those issues where if the law and what is necessary collide you change the law and simply default on any attempt by Europe to gainsay it. We’ll sort it out later at the European Court.

    Thank god Ireland retains enough sovereignty to make this call because I don’t doubt for a minute that were we obliged to go forelock tugging to a European Banking Commission for permission, AIB would be allowed to fail – a French major would not.

    The question now becomes – can we construct a regulatory framework which means that Irish banks retain an explicit sovereign guarantee (can’t unring that bell) but in which taxpayer exposure is limited by more effective solvency requirements, restriction on consolidation beyond a dangerous market share and shared emergency funds such as the Irish League of Credit Unions operates?

  • Comrade Stalin

    Wilde Rover :

    So when the banks make money it’s their money, and when the banks lose money is the loss of the taxpayer.

    That’s a great scam. Where do I sign up?

    I think the banks and their shareholders will be paying for their mistakes for quite a few years to come. Not only in terms of potential punitive costs, but also in terms of regulation being ratcheted up. We’re likely to see the introduction of a pan-European, if not global, code of banking conduct which will lay down some fundamental restrictions. You would like to think that the banking industry will, in addition, come to the realization that it needs to take more care about how it lends money and deals with derivatives and other technical clever stuff. The idea that there is a scam is far removed from the truth.

    It remains the case that approaching these matters in an ideological manner would lead to catastrophic economic circumstances. Think of the demographic who would get hurt the most here. Those who have spent the last few years splurging borrowed money, failing to save for their pensions, and living in rented accomodation, would barely get hurt. Those who have run their finances carefully, avoided debt and saved prudently, for a rainy day, and managed their mortgage carefully – in other words, those who live more or less ideal lives within capitalism – would get screwed.

    I agree with Mark. Other countries are quite flagrant in how they deal with European law. Danone is one case that I can think of where the French quite deliberately misused EU provisions to prevent a company from being taken over from outside; meanwhile the UK allows it’s utilities to be taken over by French firms. Ireland has been a very good EU citizen, so if the French can judiciously ignore EU regulations occasionally I don’t see why Ireland cannot.

  • Brian Walker

    Suilven quotes Commissioner Kroes> “When Europe was confronted with a banking crisis in the 1930s, governments decided to go national, to retreat from the European markets and close their borders. Protectionism was not the solution at the time, as we very well know. Let us not make the same mistake twice.”

    Who’s talking about protectionism? The single market isn’t being suspended. There is no European solution in place for dealing with such an urgent problem as impending bank collapse and there isn’t likely to be one any time soon. Ireland may have gone over the top and violated anti-competition rules but I doubt if she will suffer. Her action will be buried in some common statement of values at the weekend. You can’t go back on guarantees, can you? The nation State has to be the default position. Does anyone seriously disagree?

  • manichaeism

    The EU competition commisioner must be a comedian suggesting that we should all stick together. No one in Europe gave a toss about the Irish banks until now.

  • “You would like to think that the banking industry will, in addition, come to the realization that it needs to take more care about how it lends money and deals with derivatives and other technical clever stuff.”

    Some parts of the industry already did – three years ago

    ”I’m an old-school banker,” Clark told reporters last month in Calgary after the annual shareholder meeting. ”I don’t think you should do something you don’t understand, hoping there’s somebody at the bottom of the organization who does.”

    Clark, who holds a master’s degree and doctorate in economics from Harvard University, said experts with doctorates in math met him for several hours each week to educate him on credit and equity products that were being traded by the group. Clark said he decided the business was too risky for a bank that relies on consumer lending and money management for about 80% of profit.

    ”The whole thing didn’t make common sense to me,” said Clark, who joined the bank through its 2000 acquisition of CT Financial Services Inc. and was named CEO almost three years later. ”You’re going to get all your money back, or you’re going to get none of your money back. I said, `wow!’ if this ever went against us, we could take some serious losses here.”

  • Dave

    Some folks never learn. When the State is willing to assume the risk of business transaction, then those who are engaged in that business will trade recklessly, freed from the consequences of their recklessness by passing the risk onto the State. This intervention in the free market is at the core of the problems in the US banking system, where the State assumed responsibility for five trillion dollars worth of property loans by nationalising its GSEs, Fannie Mae and Freddie Mac. That State gave an implicit guarantee, and the free market forced them to make good on it. The same will happen in all sectors where the State is willing to assume responsibility for the risks involved in private business transactions. Far from guaranteeing the survival of banks, this measure will guarantee that they fail – and that the State picks up the tab. That’s just how it works, kids.

    By the way, has either AIB or the Irish banking regulator said that there was an urgent need to proffer this guarantee in order to fend off imminent collapse? No. This is old Dr Neary cutting out the womb just in case the woman should ever have a cyst on it. Cowen, moron par excellence, has done a wonderful job of creating the impression among the international community that the Irish banking system was in clear and present danger of collapse, when the banking regulator said only last week that it was sound. Indeed, if this measure was needed to safeguard Irish banks, then why is the minister now considering extending it to foreign banks? Does he believe that his urgent measure didn’t go far enough; and if so, why didn’t he include the foreign banks? If foreign banks aren’t crucial to the economy, then why extend the exposure of the taxpayers to provide insurance for the soundness of their business deals?

    And what would happen is a bad business fails? Oddly enough, nothing other than its replacement by a good business. Chicken Little says the sky will fall in.

  • Harry Flashman

    Those who view this as a failure of the free market system need to seek their information from sources that aren’t a) utterly ignorant about how business operates and b) usually have an in-built aversion to the capitalist system, ie pretty much most of the mainstream media.

    This is a failure of government interference in the free market system and the current lemming like rush to adopt the “solution” of even more government interference in the free market will turn a serious situation into a calamity.

    We are informed that this problem originates with sub prime mortgages in the US. Why is this so? Why did banks and lending institutions in the US abandon decades of safe lending practices in order to lend money to people who could blatantly not afford to repay their debts? Why? Because the US government, more specifically the Democratic presidents Carter and Clinton told them to.

    Faced by what they saw as a disproportionately low level of home ownership among minorities, the US government instructed the banks by law to be more flexible in their lending, to accept welfare payments as source of income for example, this despite the banks warning of the horrific outcome of such meddling. In the good times it wouldn’t matter so much but come a downturn in the housing market, as downturns regularly come, these “foodstamp” mortgages were going to be one god awful mess, as indeed has come to pass.

    So now we have the situation where the only logical response is to let the failing businesses fail, people can move their money and credit to the sounder businesses, but no once again government wants to intervene and prop up the deadbeats and thus by inference weaken the good businesses.

    For example, we now see the situation in the UK where savers are taking money out of perfectly sound British financial institutions and depositing them in junk banks like Anglo-Irish Bank, which in a free market should be allowed to go under but instead gets special protection from the Irish government while the better run competition suffers withdrawals of their business.

    Gordon Brown the man who sold gold off at the bottom of the market and who destroyed the British pension system now wants to take your money and give it to incompetent bankers because he is being panicked into it by ill informed chatterers. Trust me there is no market problem that can’t be made a thousand times worse by government interference.

    Let the bad banks fail, it’s the only option, we let the steel mills, the coal mines and the shipyards go, banks are only businesses too, if they’re not up to it then they must die.

  • not_again_kensei

    Harry

    We are informed that this problem originates with sub prime mortgages in the US. Why is this so? Why did banks and lending institutions in the US abandon decades of safe lending practices in order to lend money to people who could blatantly not afford to repay their debts? Why? Because the US government, more specifically the Democratic presidents Carter and Clinton told them to.

    Once again, it wasn’t fanny and freddie, and the subprime market exploded because there was thought an opportunity for private profit. If the problem was also only defaulting mortgages, it’d be bad, but not this messed up Please see previous thread on the matter:

    http://sluggerotoole.com/index.php/weblog/comments/countdown-to-breathing-space-or-disaster-congress-decides/

  • Wilde Rover

    Comrade Stalin,

    “You would like to think that the banking industry will, in addition, come to the realization that it needs to take more care about how it lends money and deals with derivatives and other technical clever stuff.”

    Yes, that is a nice thought.

    “Think of the demographic who would get hurt the most here. Those who have spent the last few years splurging borrowed money, failing to save for their pensions, and living in rented accomodation, would barely get hurt. Those who have run their finances carefully, avoided debt and saved prudently, for a rainy day, and managed their mortgage carefully – in other words, those who live more or less ideal lives within capitalism – would get screwed.”

    Splurging borrowed money? Failing to save for their pensions? Living in rented accommodations? What has that got to do with anything?

    Well, let’s take your line of thought to its logical conclusion. The demographic you refer to took it upon themselves to put their money in these banks. They took it upon themselves to take out mortgages. If you deal with a business and it goes under that’s your problem.

    Why should lower income people, as taxpayers, have to assume the burden of maintaining the lifestyle of those financially better off than them? Your proposal sounds like welfare for the well off.

    Dave,

    “When the State is willing to assume the risk of business transaction, then those who are engaged in that business will trade recklessly, freed from the consequences of their recklessness by passing the risk onto the State.”

    Human nature at work.