Dan White: Bailout has saved our banks for now -- but will this gamble pay off?

Dan White

Has the bailout solved two problems at the cost of storing up another problem for the future?

First things first.

There is absolutely no doubt that the Irish banks were on the brink of going bust last week.

On Friday, AIB announced that it had lost €13bn, a sixth of the total deposits since the middle of the year.

This in turn triggered more withdrawals from AIB and the other Irish banks. Without a bailout it is doubtful if AIB, or perhaps all of the Irish-owned banks, could have opened for business this morning.


The Irish banking crisis was in turn threatening to bring down the euro.

By the end of September the ECB had pumped €120bn of emergency funding into the Irish banks.

This figure had climbed even higher by last week. With a huge chunk of its balance sheet riding on the extremely shaky Irish banking system, any financial collapse in this country would, by bankrupting the ECB, have brought down the euro also.

The weekend bailout, which has been estimated at €80bn - €90bn, removes the risk that Ireland poses to the eurozone.

Over the next few weeks the Irish banking system will be savagely "restructured".

This is likely to see AIB sold off to a foreign bank, possibly Spain's Santander, for a pittance, and the good bits of Permanent TSB, EBS, Anglo and the Irish Nationwide scattered to the four winds.

Only good old Bank of Ireland, 227 years young, is likely to survive in anything like its current form.

By the time the dust settles on the great Irish banking crisis the Old Lady of College Green will almost certainly be the only remaining Irish-owned bank.

This transfer of the ownership of most of the Irish banks into foreign hands, not the weekend bailout, represents the real loss of long-term economic sovereignty.

In future lending decisions that would previously have been made in Dublin will be made in London, Frankfurt or Madrid.

While the bailout has saved the euro and the Irish banks it is not without risks for the future.

An €80bn - €90bn bailout will, if fully drawn down, almost double the official Irish national debt to more than €200bn.

This compares to Irish annual economic output, as measured by GNP, of just €125bn and a tax take of just €31bn. On the face of it those numbers can't be made to add up.

What the EU, the IMF and the Irish Government seem to be hoping for is that, now that the immediate problem of the banks has been solved, the Irish economy will return to rapid growth.


Not alone would this mean that the Irish Government would not have to draw down the full amount of the multi-billion euro bailout but that both the overall Irish economy and our tax take would also rise quickly thus reducing the burden of the increased national debt.

Will this gamble pay off?

If it does, then we will look back at the weekend as the time when Ireland's economic recovery began.

If not, then we will be back for another bailout in a couple of years time.