Lenihan's masterstroke has bought us time to sort out our own problems
We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed they hardly deserve to be covered by the guarantee
Finance Minister Brian Lenihan has made a wise choice. By coming up with a unique, Irish plan -- guaranteeing all deposits -- instead of importing a failed solution from abroad, he has instilled confidence in the Irish financial system.
Most importantly, Irish banks are now safe. This is the single most crucial upshot of yesterday's move.
Political and financial reaction has been positive and, encouragingly for the challenges ahead, when everyone else around him was losing their heads the minister kept his.
The financial markets abroad have taken the news very positively. This is doubly impressive when you think of what is going on outside the country. Granted the markets will be jittery and unstable for some significant time to come.
However, by drawing a line in the sand and by indicating that the sovereign state will do its job and preserve the system, the minister has shown real leadership.
We now have an anchor and the stability banks needed to sort out their own houses. The whole point of this is to get credit and loans back into the real economy as quickly as possible.
Nor should the guarantee come for free. The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government's trust, not in their own interest, but in the national interest.
One way of looking at these events -- when sellers are attacking the Irish system -- is to compare it to a military attack.
Time is of the essence. If the defences are crumbling everywhere -- as they have been in the UK, Netherlands, Belgium and the USA -- it's no use mounting the same defences as those which have been overwhelmed elsewhere.
You have to insulate your own system first by using tactics that no one else has deployed.
Near term, this government guarantee obliterates the sellers who do not have Ireland's national interest at heart.
Further out, it also buys us time to sort out our problems. (I'd have paid good money to see the faces of hedge-fund managers in London yesterday morning when they suddenly became conscious that their strategy against Ireland was in tatters and they realised that they stood to lose the millions they gambled against the Irish system).
We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed that they hardly deserve to be covered by the guarantee, but the choice was between the system or bust.
The minister obviously thought that by guaranteeing some banks and not others -- as many of his advisers argued -- he would open up the prospects of the weaker banks undermining the stronger ones. He has put the system first and this can only be a good thing.
As this column has argued before, there is plenty of time for recrimination. By keeping the banks liquid, the private sector will solve the problem of writing down bad loans, working with debtors to get the best deal and, most importantly, by doing all this in a controlled, not panicked fashion. When people are panicking, they tend to make the wrong decisions.
The nub of the minister's dilemma was how to do something revolutionary that was quick, decisive and, most importantly, simple.
If we look at what the rest of the world is doing to try to stabilise their banks, we see all sorts of convoluted plans which amount simply to a large game of pass the parcel.
Every time a weak bank is passed on to a not-so-weak bank, market confidence takes a hammering and we are back to square one. The guarantee eliminates all this nonsense.
Now, we have to plot the next phase. How do we keep credit flowing in to those parts of the real economy which are productive? How do we accelerate the process of cleaning up the banks' balance sheets and in time, and how do we punish those who recklessly got us into the mess?
But yesterday was for action not ideology; it was for stability not recrimination; and, most crucially, it was a time for practicality not complexity.
Over the course of the next few days, we are likely to see capital inflows into the Irish banking system as investors elsewhere seek the sanctity of a government bank guarantee as opposed to the uncertainty of a bank deposit, when it is clear that the banks are operating on the hoof.
Longer term, we can expect foreign banks to move here, setting up offices in Ireland and creating a banking industry which will thrive. We have set the template. The upside greatly outweighs any possible downside. The system is the most important thing at this stage. A threat can now, with the right accompanying policies, be turned into an opportunity.
In time, Brian Lenihan's move yesterday will be seen as a masterstroke and a practical blueprint for the new financial architecture which will emerge from this global crisis.