Ireland's bank guarantee could be model for other countries
Ireland's decision to guarantee Irish banks' deposits and debts for two years to calm investor concern could be followed by other countries.
''This may be a template for rescues elsewhere if Irish banks can replenish their capital base,'' Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Group Plc in London said in a note today.
The guarantee of about 400 billion euros will last for two years and covers liabilities at Allied Irish Banks Plc, Bank of Ireland Plc, Anglo Irish Bank Corp., Irish Life and Permanent Plc, Irish Nationwide Building Society and the Educational Building Society.
The measure came hours after the U.S. House of Representatives rejected a $700 billion financial-rescue package to buy troubled assets from financial companies to help ease the credit crunch. The Irish plan compares with actions in Belgium and the U.K., where governments have injected capital into individual banks, or seized them.
''Certainly this will be looked at by governments elsewhere as a model,'' said Paul Niven, head of asset allocation at F&C Investments in London, which oversees $200 billion. ''It's likely that deposits could be guaranteed, but guaranteeing other parts of the balance sheet in places like the U.S. and the U.K. seems hugely complex.''
The Irish government measure is ''not good for Irish sovereign risk near term, but we would not overdo the story as Irish debt/GDP is very low,'' Sian wrote. ''This brings forward the recovery period, though admittedly there will be a lot of economic pain in between.''
The perceived risk of a default by Ireland surged to a record after the government announcement. Credit-default swaps on Ireland's government bonds rose 30.6 basis points to an all- time high of 63.5, according to CMA Datavision prices. Credit- default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange company fail to adhere to its debt agreements.
Irish financial stocks rose after the announcement, with the country's benchmark ISEQ index gaining as much 6.5 percent. Irish Life & Permanent soared 28 percent to 4.57 euros as of 12:08 p.m., Anglo Irish Bank increased 35 percent and Allied Irish gained 16 percent. Bank of Ireland increased 16 percent.
''We have to create confidence,'' Finance Minister Brian Lenihan said on RTE Radio in Dublin. ''We can't bail out a particular bank. That wouldn't be right. What we have decided to do is give a general guarantee that the banks can lend in security and safety.''
The tighter credit sparked last year by the collapse of the U.S. subprime mortgage market has already forced Lehman Brothers Holdings Inc. to file for bankruptcy-court protection and prompted the U.S. government to take over American International Group Inc. In Europe, Fortis and Dexia SA will both get state- backed rescues, while Bradford & Bingley Plc was seized in Britain. (Bloomberg)