what would have happend if we didnt have the bank guarantee

CatFromHue

i've looked through the forum every now and again but have never seen the answer to my question. if it has mods feel free to close this thread.

one thing we hear repeatedly is that the banking system had to be gauranteed.

my question is what would have happened if the government didnt go through with the scheme?

in my mind if there was a run on the banks and they folded, people with money in the banks would have lost it, or a large portion of it.

am i right?

SkepticOne

Depends on what deposit guarantee was in place. For a long time it was IIRC about 22K which in itself probably contributed to panic in the banking system. This was later raised to 100K shortly before the blanket guarantee was introduced.

CatFromHue

i heard about the 100,000 but yeah i thought that was after the guarantee.

something that is on my mind is that when people give out about the government bailing out the banks and not giving the money to xyz. is that by bailing out the banks have in fact the government actually saved the "regular" people money, as if the bansk failed they'd have lost the majority of their savings?

SkepticOne

The main guarantee people complain about is the blanket guarantee that also covered bond holders of banks in addition to depositors. However if there was no guarantee whatsoever then yes people would have lost money. Eventually some of it might be recovered when the banks sell their assets.

liammur

CatFromHue wrote: »

i've looked through the forum every now and again but have never seen the answer to my question. if it has mods feel free to close this thread.

one thing we hear repeatedly is that the banking system had to be gauranteed.

my question is what would have happened if the government didnt go through with the scheme?

in my mind if there was a run on the banks and they folded, people with money in the banks would have lost it, or a large portion of it.

am i right?

Most would agree that deposits up to a certain amount should be guaranteed.
However, the real issue is whether liabilities should have been guaranteed, and most working in the financial markets believe this was an inexcusable and very expensive mistake to make.The banks are still on the verge of collapse, and as i wrote here previously, they have the capacity to crash the state.

P. Breathnach

liammur wrote: »

Most would agree that deposits up to a certain amount should be guaranteed.
However, the real issue is whether liabilities should have been guaranteed...

Any money I might have on deposit in a bank is, from the bank's point of view, a liability.

and most working in the financial markets believe this was an inexcusable and very expensive mistake to make.

Really? I am well aware that many who post here or who participate in radio phone-ins are of that view, but I would like to see evidence that the professionals in the business take the same position.

How might Joe Citizen's savings of a few thousand have survived if the large institutional lenders had no guarantee, and sought to withdraw their funds? The banks would have imploded in minutes (thanks to technology -- eighteenth century bank crashes typically took hours or even days).

The banks are still on the verge of collapse,

I don't think so. Yes, Anglo-Irish is a terminal case, but instead of going down with a bang, it will go with a whimper -- a long drawn-out and very expensive one. The other big banks will, with much assistance, survive.

and as i wrote here previously, they have the capacity to crash the state.

I agree. Had the banks collapsed as they were on the verge of doing, our economy would have been destroyed and with it, most of our society. It's remarkable how many people do not recognise how close to disaster we were.

SkepticOne

P. Breathnach wrote: »

Really? I am well aware that many who post here or who participate in radio phone-ins are of that view, but I would like to see evidence that the professionals in the business take the same position.

One example would be Morgan Kelly. Here's an extract from an article he wrote back in May. It is worth reading the full article.

It no longer a question of whether Ireland will go bust, but when. Unlike Greece, our woes do not stem from government debt, but instead from the government’s open-ended guarantee to cover the losses of the banking system out of its citizens’ wallets.

[...]

We have long since left the realm of easy alternatives, and will soon face a choice between national bankruptcy and admitting the bank guarantee was a mistake. Either we cut the banks loose, or we sink ourselves.


While most countries facing bankruptcy sit passively in denial until they sink – just as we are doing – there is one shining exception: Uruguay. When markets panicked after Argentina defaulted in 2002, Uruguay knew it could no longer service its large external debt. Instead of waiting for a borrowing crisis, the Uruguayans approached their creditors and pointed out they faced a choice.


Either they could play tough and force Uruguay into bankruptcy, in which case they would get almost nothing back, or they could agree to reduce Uruguay’s debt to a manageable level, and get back most of what they lent. Realising Uruguay’s problems were largely not of its own making, and that it had never stiffed its creditors in the past, the lenders agreed to a debt restructuring, and Uruguay was able to return to debt markets within a few months.url=http://www.irishtimes.com/newspaper/opinion/2010/0522/1224270888132.html]source[/url

liammur

P. Breathnach wrote: »

Any money I might have on deposit in a bank is, from the bank's point of view, a liability.



Really? I am well aware that many who post here or who participate in radio phone-ins are of that view, but I would like to see evidence that the professionals in the business take the same position.

How might Joe Citizen's savings of a few thousand have survived if the large institutional lenders had no guarantee, and sought to withdraw their funds? The banks would have imploded in minutes (thanks to technology -- eighteenth century bank crashes typically took hours or even days).



I don't think so. Yes, Anglo-Irish is a terminal case, but instead of going down with a bang, it will go with a whimper -- a long drawn-out and very expensive one. The other big banks will, with much assistance, survive.



I agree. Had the banks collapsed as they were on the verge of doing, our economy would have been destroyed and with it, most of our society. It's remarkable how many people do not recognise how close to disaster we were.

Deposits are not a liability lol.
One of the big problems Irish banks face is there is not enough deposits in the irish banks.
Nobody rates our finance minister (apart from the Irish). We need a banking system not THE ( BOI/ALBK) banking system. If I were a betting man, you couldn't/wouldn't /shouldn't guarantee my positions, because you don't know what they were and effectively they could bankrupt you too. This basic principle was beyond our government.

P. Breathnach

SkepticOne wrote: »

One example would be Morgan Kelly. Here's an extract from an article he wrote back in May. It is worth reading the full article.

Is Morgan Kelly a professional working in the financial markets?

liammur

P. Breathnach wrote: »

Is Morgan Kelly a professional working in the financial markets?

The rating agencies keep downgrading our banks, our bond yields keep rising. They know we erred, and erred badly.

P. Breathnach

liammur wrote: »

Deposits are not a liability lol....

If I deposit €5k in a bank, the bank then owes me €5k. On their books, that is a liability, and not fundamentally different in nature from money borrowed on the bond market as senior bonds.

Max Power1

liammur wrote: »

Deposits are not a liability lol.
One of the big problems Irish banks face is there is not enough deposits in the irish banks.
Nobody rates our finance minister (apart from the Irish). We need a banking system not THE ( BOI/ALBK) banking system. If I were a betting man, you couldn't/wouldn't /shouldn't guarantee my positions, because you don't know what they were and effectively they could bankrupt you too. This basic principle was beyond our government.

Basic accounting 101 here, deposits (and any other funds lodged in a financial institution) are always classed as a liability.

Its an amount that the bank owes to me and can be withdrawn from the bank.

liammur

P. Breathnach wrote: »

If I deposit €5k in a bank, the bank then owes me €5k. On their books, that is a liability, and not fundamentally different in nature from money borrowed on the bond market as senior bonds.

Correct, however, the real liablilities that the 2 main banks have was their wreckless lending.

No bank worries about deposits.

ei.sdraob

P. Breathnach wrote: »

Is Morgan Kelly a professional working in the financial markets?

He did a better job at predicting events than all those financial "experts" on bank payrolls whose job was to tell the banks and the govt what they wanted to hear not the grim reality.

Oh and you're wrong about the main banks, Bloomberg had headline only few days ago about the story state of aib and high risk of their fall

P. Breathnach

liammur wrote: »

The rating agencies keep downgrading our banks, our bond yields keep rising. They know we erred, and erred badly.

You don't actually make a connection.

Yes, our bond yields are high, indicating that the market sees us as being in serious trouble. But that does not mean that the deposit guarantee was a wrong move, or that the markets judged it to be a wrong move.

liammur

P. Breathnach wrote: »

You don't actually make a connection.

Yes, our bond yields are high, indicating that the market sees us as being in serious trouble. But that does not mean that the deposit guarantee was a wrong move, or that the markets judged it to be a wrong move.

The blanket guarantee was wrong. That's my point, not a few €K a punter may have in deposit in a bank. How can you guarantee what you don't know what you have guaranteed? That's what we did in the case of Anglo in particular, but also Ir Nationwide , AIB and BOI.

Sand

basic accounting 102:

You go to the bank and lodge 5K Euro.

The bank increases their cash by 5K Euro (Asset)

The bank increases their debt to you by 5K Euro (Liability)

The "liabilities" liammur was referring to I assume are the bonds (senior and subordinated) that already existed at the time of the guarantee. There is no excuse for guaranteeing these - and indeed the government should have set their lawyer buddies on building up a credible default threat so as to beat them into a debt for equity swap.

The only possible guarantee that should have been made was on *future* bonds issued by a relaunched bank under new management and new ownership.

I don't think so. Yes, Anglo-Irish is a terminal case, but instead of going down with a bang, it will go with a whimper -- a long drawn-out and very expensive one. The other big banks will, with much assistance, survive.

Theyre unable to borrow from the markets on their own merit.

Theyre unable to borrow from the markets with a state guarantee

The state is unable to borrow from the markets so as to plough more capital into them

They are for all intents and purposes state owned.

The state is insolvent.

Atlantic Dawn

The guarantee is worthless as if it was called on the State could not possibly pay all depositors.

Victor

Atlantic Dawn wrote: »

The guarantee is worthless as if it was called on the State could not possibly pay all depositors.

But depositors can't all say "Pay now" when the due date on the debt might be in 10+ years time

Even if the were convertible for cash on demand, not everyone would ask.

Of course, for all these debts, there tends to be at least some (now less valuble) asset.

liammur

No one should be in any doubt as to grave situation our banks and economy are in. If FF had it's time over again, Anglo/Ir nationwide would not be guaranteed, unless they are thicker than I even think they are.
It can be seen from today's independent the panic that is rife on the markets re Ireland.

Bank shares plunged as much as 20pc last night as the sovereign bond crisis took its toll on Ireland's leading banking stocks.
Government bonds remain firmly in danger territory even after Finance Minister Brian Lenihan's announcement of €6bn of cuts for next year.
Irish Nationwide, meanwhile, is being sued in a British court over attempts not to honour the face value of subordinated debt.
AIB shares fell to an all-time low of just under 27c last night, losing 12pc of their value in a brutal day's trading. AIB shares have dropped more than 40pc in the past month. Some investors have expressed concern about a fresh stress test being done at the bank.
The fall increases the gulf between AIB's 27c share price and the State's commitment to buy new AIB shares as 50c each later in the month.
Shares in bancassurer IL&P saw the sharpest fall yesterday, down almost 20pc at the close. It left the bank's shares at a level not seen since the dark days of April 2009.
Bank of Ireland's stock also slumped to its lowest since April 2009, closing down more than 11pc at just under 44c. The fall means the shares are now trading 35pc lower than they were a month ago.
The yield on Irish 10-year government bonds steadied over the course of yesterday to settle around 7.6pc. It is the first sign of stability for close to two weeks, even if the yield remains in the danger zone.
The difficult picture complicates fundraising efforts for a number of state bodies. The National Asset Management Agency has plans to issue a €2.5bn bond in the fourth quarter, but the agency may hold off issuance unless the climate improves. Bonds from Bord Gais and ESB are also believed to have been hit due to sovereign concerns and ratings downgrades.

SkepticOne

P. Breathnach wrote: »

Is Morgan Kelly a professional working in the financial markets?

Better.

Godge

To answer the OP:

Deposits of up to €100,000 (I think) were already guaranteed under the existing scheme.

Anglo Irish Bank would have gone bust and the bondholders, shareholders and those with deposits of over €100,000 would have got burned.

The State would have been forced to nationalise BOI and AIB (the latter is happening anyway).

EBS and Irish Nationwide would have been let go. Irish Life and Permanent would have been interesting in the light of Quinn's demise. There might have been an argument for keeping them afloat in that context.

The net result of all of the above would have been a serious short term shock to the economic system. However, the long term cost to the taxpayer would have been less.

Liam Byrne

CatFromHue wrote: »

.....as if the bansk failed they'd have lost the majority of their savings?

So those of us without the luxury of €22,000 savings have been charged that much anyway, and have additional taxes to look forward to.

So we've lost money.

Losing whatever savings we had might have been a better alternative.

Drumpot

Why does the phrase "the blind leading the blind" come to mind when I read through some of these kinds of threads . .

Some guy said we shouldnt of saved the banks or guarantee subordinated bondholders , therefore it must be true . . :rolleyes:

Its funny that there is so much debate on what should or should not of been done, but you will never get complete concensus on what is/was the correct course of action. . Is that perhaps because everybody (educated and uneducated) has a view on what teh best course of action should be taken and because there is no way that we could of been guaranteed of getting throught this mess one way or another ?

When the dust finally settles (whenever that may be), we will only then be able to truly judge how good/bad the decisions made impacted on society. People speak about not bailing out the banks as if things would of been most definitly better. .

I honestly dont know and was interested in seeing if the OP's question could be properly debated. But like most "debates" on what if, there is an angry mob more concerned with twisting the knife and just having a go at the government instead of constructively putting informed, educated, objective theories to the test . .

Its funny cause when you ask for people to elaborate on why Labour/FG would be better, they say they arent FF (as if that guarantees better). .

When you ask people why they think the bailout was wrong, they rant off about bankers getting off and they quote a couple of people as factual proof that everything done was wrong. . I never claim to know all the answers and I want to know what should of been done, but some of the waffle on boards.ie that really never amounts to anything more then self indulged educated presumptions, as opposed to informed rational cohesive debate. .

Cue "FF spin doctor" accusations . . Yes, wanting to hear credible evidence is wrong . . Angry mob with pitchforks works ..

skelliser

Gauranteeing anglo was imo a criminal act. I think we will find out pretty soon how deep the connections are between FF and anglo.

ei.sdraob

Drumpot wrote: »

Its funny cause when you ask for people to elaborate on why Labour/FG would be better, they say they arent FF (as if that guarantees better). .

Both FG and LAB have come up with some great plans and ideas only to be ignored

take the Good/Bad bank solution, it was rubbished by FF and Alan Dykes of Anglo, only for them few month later for the former to be saying that one is needed, after pouring 30+ billion into Anglo :rolleyes:

or take the nationalisation, some were saying to heck with it and nationalise the big main banks, FF said no, NAMA will get credit flowing :rolleyes: few years later the banks are nationalised or practically are.


Yes FG and LAB are fairly ****ty alternatives, but they are infinitely better than FF who simple keep making a bad situation worse at every turn.

liammur

Godge wrote: »

To answer the OP:

Deposits of up to €100,000 (I think) were already guaranteed under the existing scheme.

Anglo Irish Bank would have gone bust and the bondholders, shareholders and those with deposits of over €100,000 would have got burned.

The State would have been forced to nationalise BOI and AIB (the latter is happening anyway).

EBS and Irish Nationwide would have been let go. Irish Life and Permanent would have been interesting in the light of Quinn's demise. There might have been an argument for keeping them afloat in that context.

The net result of all of the above would have been a serious short term shock to the economic system. However, the long term cost to the taxpayer would have been less.

Quinn had nothing do to with Irish Life & P. His stake was in Anglo.
In fact that was the 1 institution that cost the tax payer nothing, and it has nothing to do with NAMA. It was also the 1 institution that the government wanted heads to roll in. You couldn't make it up.

liammur

P. Breathnach wrote: »

Is Morgan Kelly a professional working in the financial markets?

From today's indo:
Market traders based in London and Europe have this weekend rubbished the Government's plan to reduce the country's debt, saying it is "beyond fantasy".
"Ireland's plan simply isn't credible and hence the interest rate (on government bonds) remains high," said one UK-based trader.
"We don't think it will work and we see the EU or the IMF stepping in. The ever-increasing bank bailout has seriously damaged Lenihan's credibility to the point where many of us think he has none," the trader added.


I would recommend listening to P Somerville clip on the other thread to gain an insight into just how inept our current Govt is, and why and how no professionals are listening to them.

P. Breathnach

liammur wrote: »

From today's indo:
Market traders based in London and Europe have this weekend rubbished the Government's plan to reduce the country's debt, saying it is "beyond fantasy".
"Ireland's plan simply isn't credible and hence the interest rate (on government bonds) remains high," said one UK-based trader.
"We don't think it will work and we see the EU or the IMF stepping in. The ever-increasing bank bailout has seriously damaged Lenihan's credibility to the point where many of us think he has none," the trader added.

I set out to question your assertion that "the real issue is whether liabilities should have been guaranteed, and most working in the financial markets believe this was an inexcusable and very expensive mistake to make."

You have not dealt with that.

I would recommend listening to P Somerville clip on the other thread to gain an insight into just how inept our current Govt is, and why and how no professionals are listening to them.

I heard it live, and was reminded of certain posters in this forum. I thought also of Private Frazer: "Doomed, I tell you, we are all doomed.".

Godge

liammur wrote: »

Quinn had nothing do to with Irish Life & P. His stake was in Anglo.
In fact that was the 1 institution that cost the tax payer nothing, and it has nothing to do with NAMA. It was also the 1 institution that the government wanted heads to roll in. You couldn't make it up.

I know his stake was in Anglo.

Irish Life and Permanent is a banking and insurance play. Would the Government have saved IL&P because of the insurance element is the caveat I was entering especially given Quinn would have gone belly-up immediately Anglo was let go bust. IL&P might have been all right to date but in the scenario of letting Anglo go bust, they would have been under pressure. The Government would have been losing Quinn and Anglo, would they have saved a different Irish insurance company???

liammur

Godge wrote: »

I know his stake was in Anglo.

Irish Life and Permanent is a banking and insurance play. Would the Government have saved IL&P because of the insurance element is the caveat I was entering especially given Quinn would have gone belly-up immediately Anglo was let go bust. IL&P might have been all right to date but in the scenario of letting Anglo go bust, they would have been under pressure. The Government would have been losing Quinn and Anglo, would they have saved a different Irish insurance company???

I'm led to believe that the govt were pretty pissed off with IL&P, because they refused the govt's plan of merging BOI with IL&P. They wouldn't be under huge pressure because they are the 1 institution that foreign institutions (Allianz) are interested in taking over.