Government undertakes to underwrite all domestic financial institutions

mike65 · 30-09-2008 9:10am #1

Yep - a 400 billion euro guarantee lasting 2 years, for the Irish system so not including Rabo, Ulster and a few others.

Mike

helimachoptor · 30-09-2008 9:16am

mike65 wrote: »

Yep - a 400 billion euro guarantee lasting 2 years, for the Irish system so not including Rabo, Ulster and a few others.

Mike

Does the government even have 400 billion??

is_that_so · 30-09-2008 9:18am

The potential cost is about ten times the national debt. But there will be a commercial charge to banks. Briefing @ 9.30 today so we should hear more about the plan by mid-morning. Generally seen as a smart move, as reflected in the ISEQ index - up 3% today.

Hanley · 30-09-2008 9:19am

helimachoptor wrote: »

Does the government even have 400 billion??

The 400 billion only comes into play if ALL the banks under the deposit protection scheme fail. And tbh, if that happens, the 400bn's gonna be the last of our worries!!

mike65 · 30-09-2008 9:23am

Exactly, its entirely a confidence booster. Will it encourage money to enter the system from abroad?

Mike

Économiste Monétaire · 30-09-2008 9:23am

Here's a link to the full RTE story.

An out-take:

RTE wrote:

The banks that are covered are: Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society and specific subsidiaries that may be approved by Government following consultation with the Central Bank and the Financial Regulator.

The safety of deposits of up to €100,000 in all banks operating in this country has already been guaranteed by the Government.

gabigeist · 30-09-2008 10:38am

is_that_so wrote: »

Generally seen as a smart move, as reflected in the ISEQ index - up 3% today.

I would read this as meaning: 1) The Irish government will not allow a bank to fail as they would now bear the cost.
2) The banking sector is obliged to the government for improving their trading environment.

If a bank were about to fail, the more likely outcome would therefore be a forced marriage (rather than nationalisation or receivership) as the other banks will be under the govt's thumb.

If that argument holds true then fair play to the govt for a ballsy move. It gives the banking sector as a whole a better chance whilst also seeking to ensure that they bear the costs of any collapse.

is_that_so · 30-09-2008 10:45am

Comments from RTE Business chap suggests that all of this may be the start of more effective banking regulation. Fortis had to give up 49% of its equity. Irish banks will have to pay for the guarantee, although they are not releasing the actual charges.

prendy · 30-09-2008 10:49am

is_that_so wrote: »

Comments from RTE Business chap suggests that all of this may be the start of more effective banking regulation. Fortis had to give up 49% of its equity. Irish banks will have to pay for the guarantee, although they are not releasing the actual charges.

i think its a very smart move by the Govt. And regulating the banks has to happen, they are totally to blame for all this.

Burial · 30-09-2008 11:05am

I'm not an economist, but I'm unsure of this move. I'm aware that companies in the Us are losing faith and transferring their money from banks to Us treasury binds that are guarenteed to gold, and thus reducing how banks make their profit and eventually inflating the dollar. I imagine a similar scenario was happening here, except companies were moving to English banks, where savings are guaranteed. I'd say more European countries will announce the same. Why would you stay with a bank that can't guarantee your savings? Anyway, the announcement of the plan is suspicious. I think the Government were trying to playdown the rejection of the $700 billion plan by the USA, while trying to make the general public have confidence in the banking sector. It's good for the economy. (As seen with the spike in trading) However, it's really a short term solution. I mean imagine IF a bank failed. There wouldn't be an Irish economy to speak of. (As the budget would have to be cut more than it is at now)

Économiste Monétaire · 30-09-2008 11:55am

Burial wrote: »

I'm aware that companies in the Us are losing faith and transferring their money from banks to Us treasury binds that are guarenteed to gold, and thus reducing how banks make their profit and eventually inflating the dollar.

Since when are T-Bonds 'guaranteed to gold'? I never heard of that before. The reason T-Securities are widely considered to be the safest is because they're backed by the U.S. government.

eamonnm79 · 30-09-2008 12:06pm

is_that_so wrote: »

Comments from RTE Business chap suggests that all of this may be the start of more effective banking regulation. Fortis had to give up 49% of its equity. Irish banks will have to pay for the guarantee, although they are not releasing the actual charges.

Have you any evidence that the Irish banks are being asked to pay for the guarantee? Both oppisition leaders seem to be coming out against this. Gilmore is calling it a blank cheque.

Burial · 30-09-2008 12:08pm

UCD_Econ wrote: »

Since when are T-Bonds 'guaranteed to gold'? I never heard of that before. The reason T-Securities are widely considered to be the safest is because they're backed by the U.S. government.

Hmm, yes they are.... My bad.

is_that_so · 30-09-2008 12:11pm

eamonnm79 wrote: »

Have you any evidence that the Irish banks are being asked to pay for the guarantee? Both oppisition leaders seem to be coming out against this. Gilmore is calling it a blank cheque.

There is and will be a charge. It's in that RTE story. They haven't revealed a lot of the details on the deal. Gilmore is rightfully asking for more information but he is also playing politics with it. FG are not against it, they are also asking for more details. Richard Bruton was on the radio this morning about it.

eamonnm79 · 30-09-2008 12:15pm

UCD_Econ wrote: »

Since when are T-Bonds 'guaranteed to gold'? I never heard of that before. The reason T-Securities are widely considered to be the safest is because they're backed by the U.S. government.

Its true that investors are investing in T-Bills and getting out of financials and equities. However there has not been a gold standard since 1971.
The return on t bills also plumitted yesterday but a tiny return is always better than a loss.

Économiste Monétaire · 30-09-2008 12:28pm

eamonnm79 wrote: »

Its true that investors are investing in T-Bills and getting out of financials and equities. However there has not been a gold standard since 1971.
The return on t bills also plumitted yesterday but a tiny return is always better than a loss.

T-Bills =/= T-Bonds =/= Gold standard exchanged for a fiat currency.

eamonnm79 · 30-09-2008 12:56pm

How can The Irish government make such a move without first getting approval from the dail (if given the choice, would all government TD's vote for this if they knew what was in this massive government underwriting?). In America they are rightly having a debate and amending their bill. The government have certainly been pragmatic in this move but it was not democratic and has been done in a veil of secrecy. What is the small print on this?

Frankie Lee · 30-09-2008 1:25pm

I think the government is taking a massive gamble, but if it comes off it will be an absolute masterstroke. By doing this foreign money should flood into Irish banks which should improve liquidity of Irish banks, however if the foreign cash isn't enough to keep our banks afloat we are up ****creek.

leninbenjamin · 30-09-2008 1:51pm

the EU wont be happy with this.

is_that_so · 30-09-2008 2:13pm

They might but seeing as this malaise extends to the whole EU one would expect them to recognise the reality of the situation. Attempting to undo any of the deals would cause havoc in financial markets.

eamonnm79 · 30-09-2008 2:17pm

David MC Williams last tuesday'sIndo
"However, there is something we can do. By giving a full deposit guarantee now, the State could re-energise creditors' -- both big and small -- confidence in our banks. In fact, given what is happening all over the world, a comprehensive guarantee would prompt foreigners to lodge their money in Irish banks. As a member of EMU with the lowest State-debt-to-GDP ratio, Ireland would be ideally placed to offer itself as a financial port in this international storm."

Has our ginger friend gone from pariah that should be put on suicide watch (according to bertie), to Government chief advisor?
Lets hope he is right.
TBH I think he has good instincts. Id rather go with one of his gambles than anyone elses in this country.

gurramok · 30-09-2008 4:33pm

I hope the foreign money coming in is not a big green traffic light for Irish banks to engage in unprudent lending like they did in the bubble or the taxpayer will get even more hammered with problems down the line.

cavedave · 30-09-2008 4:42pm

Thanks eamonnm79 nice point.

What prevents something like Soros' trick on shafting Stirling on Black Wednesday from happening?

Tricity Bendix · 30-09-2008 5:04pm

I don't know whether to be excited or scared. Although there is little chance of AIB or BOI going belly up, I am nervous that my money is going to secure the deposits in Anglo Irish. However, if that bank were to collapse, the knock-on effect could be devastating, so I can see how it could very quickly become a problem for us all.

I was just saying yesterday that if I had any money at all I would be putting it in AIB and BOI.

cavedave · 30-09-2008 8:08pm

Although there is little chance of AIB or BOI going belly up, I am nervous that my money is going to secure the deposits in Anglo Iris

That assumes banking failures are independently distributed. Which they are not. Anglo Irish has a small chance of failing but if it does fail that raises the chances that a bigger bank will fail.

Run_to_da_hills · 30-09-2008 9:39pm

Can the Government trust the bank managers to be handing out future loans to the public without getting involved?.

Dose this mean that from now on that the state is going to have an interest in a customers credit rating for any future loan application to safeguard this huge commitment from the taxpayer?.

In the former days one could apply to one bank if another one turned down a loan, I can see the possible danger of the state getting involved all loan applications irrespective of what bank you approach particularly if there is a downturn. In other words you better keep a clean slate.

Économiste Monétaire · 30-09-2008 9:45pm

For the fans of Morganomics, Morgan Kelly is on Prime Time at the moment discussing the situation.

Time Magazine · 01-10-2008 12:39am

UCD_Econ wrote: »

For the fans of Morganomics, Morgan Kelly is on Prime Time at the moment discussing the situation.

I heard he got burned by a student in class today. How did his morale look?

silverharp · 01-10-2008 8:10am

Mish sems to like the plan,

http://globaleconomicanalysis.blogspot.com/

This is urgent we must get this to EVERY senator before the Senate takes a vote.

Fax Title: How To Stop A Run On The Banks

Dear senator

Today the Irish government announced a surprise decision to safeguard the Irish banking system for two years, guaranteeing all deposits, covered bonds, senior debt and dated subordinated debt of the four main banks.

The Result

Investors welcomed the news. By 0755 GMT, Allied Irish Banks PLC (AIB) rose 14%, Anglo Irish Bank PLC (ANGL.DB) rose 22%, Bank of Ireland PLC (IRE) rose6.7% , and Irish Life & Permanent PLC (IPM.DB) rose 22%.

Why Ireland's Plan Works

What Ireland is fighting is the same thing that the Fed is trying to fight here (outflows from banks and money market funds into short term government debt.)

The problem is NOT mom and pop pulling bank deposits, it is corporate treasurers and state treasurers whose jobs are on the line pulling deposits from weak banks and putting them into stronger ones.

The fastest way for the US and other governments to solve this is to raise deposit insurance ceilings. This is a far better option than ballooning the Fed's balance sheet more.

Furthermore, I would highlight that fully guaranteed deposits would put the US government even more at the top of the capital structure of banks. Existing senior debt is all of a sudden now fully subordinated to a potentially unlimited amount of insured deposit debt.

Why the Paulson Plan Fails

The Paulson plan fails because it does not stop mistrust between banks or mistrust by depositors. All it does is throw $700 billion in taxpayer money down a black hole.

The Paulson plan is also unconstitutional. There is no constitutional authority for the US Government or the Federal Reserve to use public (taxpayer) money for what is definitely a private purpose (bailing out Wall Street).

Finally, the Paulson plan takes time to implement fairly, and there are many holes in the oversight process.

Stop The Run On Banks

Temporarily guarantee all deposits at US Banks. Implement rules to ensure weak banks do not misuse this privilege by adopting risky lending practices. Orderly shut down all undercapitalized banks.

Senator, please scrap the Paulson proposal in entirety and try something that might work, that is constitutional, and does not put taxpayer money at risk.

Your Name
Your Phone Number

auerillo · 01-10-2008 8:18am

It seems the government has gone in for an irish "semi-state" type of privitiastion. They have shouldered the risk, and let the banks with the profit.

rrpc · 01-10-2008 8:51am

auerillo wrote: »

It seems the government has gone in for an irish "semi-state" type of privitiastion. They have shouldered the risk, and let the banks with the profit.

That's a very simplistic view. The government will never have to pay out on this. The problem was not that banks are about to collapse, but that the banking system had become completely dysfunctional with no long term money being available to Irish banks on the interbank market.

The knock on effects of this were substantial to the Irish economy; no long term money and the credit crunch gets harder and the economy shrinks further and a vicious circle develops.

The government were right to step in and offer a guarantee (at a price we are told) to safeguard our economy.

Or would you prefer to lose your job because your employer can't get access to working capital?