Tuesday 6 December 2016

Bank guarantee 'too generous to bondholders' - explosive European Commission report

Published 16/07/2015 | 13:09

AT LOGGERHEADS: Of most interest to the Inquiry will be how Brian Cowen and Brian Lenihan came from a position of being on opposite sides to one of agreement on a night of great tension
AT LOGGERHEADS: Of most interest to the Inquiry will be how Brian Cowen and Brian Lenihan came from a position of being on opposite sides to one of agreement on a night of great tension

The Bank Guarantee introduced in 2008 was “too generous” to bondholders, and played a major part in turning a financial crisis into a sovereign debt crisis, the European Commission has admitted in a dramatic new report.

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The Guarantee was based on a “misunderstanding” of the problem in the banks, which were seen at the time as liquidity and confidence issues triggered by the global financial crisis, instead of recognising more fundamental problems, according to the report.

Brian Cowen was Taoiseach on the night of September 29, 2008 when it was decided that a blanket guarantee for all of the banks was the route the government was taking to sort out their problems.

The now deceased Brian Lenihan was Finance Minister.

However, Mr Cowen  has essentially denied "overruling" Mr Lenihan on the night of the guarantee over the best route to take.

He told the banking inquiry recently that  Mr Lenihan wanted to nationalise Anglo Irish Bank and then only, and only extend a bank guarantee to the other banks rather than introduce a blanket guarantee.

The €375bn guarantee was double the size of the Irish economy and, by putting the State on the hook for bank losses, “eventually turned the banking crisis into a sovereign debt crisis,” according to the Commission’s 171 page evaluation of Ireland's financial assistance programme.

“With hindsight the bank guarantee appears too generous, and the fiscal impact could have probably been limited if banks had been subject to stricter requirements, as was the case in Sweden in 1991-92.”

The report, which in essence lays much of the blame for the 2010 bailout on what it sees as the flawed bank guarantee decision, says that when the 2008 decisions were taken that Irish authorities were constrained by high uncertainty.

However, it found that by 2008 the economy here was already highly vulnerable.

"With hindsight, the Irish crisis was a matter of time, with and the negative spill overs from the global financial meltdown the catalyst that made the Irish banking system collapse like a house of cards. At the same time global demand declined. Ireland's main trading partners (the EA, the US and the UK) were going through a deep and sharp recession. Irish GDP declined by 9pc in real terms and by 16.2pc in nominal terms in 2008-10.”

It was the combination of the sharp decline in tax revenues  and the cost of  bailing out the banks that triggered the national debt crisis, the report said.

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