Tuesday 19 February 2019

Our infamous bank guarantee, RIP

Faced with the horror of a banking collapse, the Government's pledge may not have been as stupid as we thought

SANG-FROID they call it – defined in my dictionary as imperturbability. It was on display in the Department of Finance and Central Bank last week as the last of the infamous Irish bank guarantee came to a close – days after the Cyprus debacle.

No problem, was the official line. There had been no withdrawals from Irish banks after the Cypriot lockdown, they said; not even any noticeable volume of calls from worried savers.

Besides, there is no crisis here and the condition of the remaining Irish banks is well known to all. No one even contemplated extending the guarantee beyond the date of last Thursday.

All of which is fair enough. It certainly would not have been a good idea to have another extension. That would have been taken as a sign of worry about deposit flight.

Still, they are cool customers in the two great guardians of the national finances if they did not have even a frisson of fear watching the Cypriot situation lurch from crisis to crisis, just as new Irish deposits above the Cypriot cut-off level of €100,000 were about to be left to their own devices.

Cyprus would have awakened memories of the introduction of the guarantee more than four years ago, even without the coincidence of the expiry date. But one could also detect, as we all watched the travails of the Cypriot people, a glimmer of recognition that the introduction of the guarantee may not have been as obvious an act of stupidity as it has, almost universally, been portrayed.

The core of the matter; for Ireland then, Cyprus now and the eurozone in future, is the horror of a collapsed banking system.

Most analysts think the eurozone arrived at the best available solution for Cyprus – having tried hard to avoid it – but simpler folk will find it difficult to see much that is good about it.

What they see are frozen bank accounts, ATMs that don't work, huge losses on large deposits and, now, restrictions on how much money can be taken out of the country. Beyond that is the loss of thousands of jobs and a deeply uncertain future.

It may have dawned on a lot of people for the first time, that this was what Ireland faced in September 2008. That does not mean a blanket guarantee was the right response, but it makes it more understandable.

It did not work, of course. Without the bailout, the financial system would have collapsed anyway, as confidence in both the banks and the guarantee evaporated.

The choice facing the Government was even more impossible in 2010 than 2008. Loans were available from the Troika to avert utter disaster – provided the terms were accepted. It was not really a choice at all.

This is precisely where the Cypriot government found itself, although all the indications are that the suffering about to be endured by its citizens will be a good deal worse than that visited upon the Irish.

It is hardly a coincidence that four governments have now accepted onerous conditions which will cause difficulties for years, rather than the intense, immediate disaster of banking collapse and national bankruptcy.

That is the way of politics but they may think that people would prefer it this way, if they really understood the alternative. But none of them have really persuaded their people that it is the better option, although the degree of public anger varies from country to country.

The problem, of course, is the terms on offer. In Ireland's case, it is the ECB insistence on repayment of all senior bondholders, even in the defunct Anglo. Yet in fairness, it has to be said that the ECB feared the even greater horror of a general banking and euro crisis.

A government which is unwilling to exercise its sovereign right to refuse such terms and let its banks go down, can hardly expect the ECB and creditor countries to put their banks at risk to help it out.

Nor do they have the capacity to deal with such a crisis. In present circumstances, a eurozone guarantee to insure lenders to the banks of Spain or Italy would be as worthless as the Irish government guarantee was to Irish banks.

Cyprus showed this clearly. Governments are afraid to make it a rule that lenders must take losses if a bank fails, because lenders might clear off and the banks would fail anyway.

They are also unwilling to share the losses with the taxpayers of the affected country, because of the costs to their own exchequers. If there is another crisis (and it is bound to be a big one if there is), we just have to wait and see what they do about it.

The Irish guarantee may have come to an end, but the risks most certainly have not.

Irish Independent

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