A very general 'what if' question on irish Banks

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i dont know much about the banking crisis apart from reading the odd article here and there and watching the news every now and then.

However i have a scenario in my head which is how i think the banking crisis could have been dealt with. Its based on the flimsy knowledge i have but i have not read anything specific which sheds light on why it would not have been possible.

Ok so here is my scenario......So its 2008 and the govt realise the banks are fecked. They are private companies so let them suffer like any other company and if they go bust they go bust. (the govt though guarantee any money in current or deposit accounts by the public)
So lets assume all the banks go bust as there is no govt support. Which creditors of the bank get their money first? The people who have deposits (the normal joe public) or the bondholders.
Ok so the banks go into liquidation and we keep the govt out of it. Havent we saved ourselves around 50 billion at this stage.
So the Govt probably need to set up a healthy bank with all the deposits taken from the bad banks.
Its the only place to do business banking wise so i’m assuming it would be profitable. However foreign banks would surely love the opportunity to come into the market place and gain a potential massive market share of the irish market. More banks would continue to come in to Ireland and the govt bank would slowly wind down.
Now i’ve heard that if the govt let the banks go under then we’d be a laughing stock and nobody would trust Ireland as a place to invest or risk money. And we would not be able to get any sort of finance
But is that true? it was private institutions which failed, the govt just didn’t step in. Surely the bond markets wouldn’t have such high interest rates as the govt would be better positioned to repay them due to no imf or ECB bailout packages burdening them already.
In addition due to the lower or no financial burden around our necks, the govt would actually be in more of a position to spend our way out of the ‘non banking related’ recession we are in.
As a few years go by even if international investors were manly staying away from Ireland...i think that they would naturally come back due to the greed of everyone out there. There would be so many opportunities in a growing Ireland again that they would quickly forget and start investing.
So by taking part in the previous actions Ireland would never have been forced into this overbearing debt burden and we would be back on normal footing again within 5-10 years.

My question : Is this scenario any way realistic if the steps above were taken? Some feedback please?

later12

/Moved to Irish Economy

Nijmegen

Hi,


Really complex, would be the answer!

Regarding deposits, the Irish government guarantee of deposits up to €100,000 - which all EU countries observe themselves, I believe - would cover your depositors, the 'Joe Soaps'.

The deposit guarantee, if cashed in, I find it hard to get figures on - but it would not sink the state per se.

The banks would go to the wall, your deposit is guaranteed and transferred to a bank that's still standing, perhaps a 'new' bank that's set up by the government and only contains the deposits.

The markets figure out the rest.

Now, the big argument was our banks would go and our economy would too, and Ireland as a sovereign wouldn't be able to borrow from international markets, who would think we lack credibility, and we'd need some sort of, I dunno, IMF bailout.

That went well.

I don't pretend to be able to paint the fullest of pictures for you, but the fact is, life would have continued if we let our banks go. I think most financial people reckon it was the worse of the bad choices of available we took.

Davekoolhill

I think its at a stage where the markets are running the show,

noodler

Legally, I believe the senior bondholders are ranke the same as the senior bondholders so perhaps a situation would have occured where there'd be no deposits left in the Irish banks as the investors take them all (worst case scenario- maybe they both get wiped out in simiar proportions).

In Sept 2008 CB figures show there was 128bn of private sector deposits in the six guaranteed banks. I think the DGS only applies to individuals rather than businesses though so not all of these would have been households.

Still begs the question of whether you should guarantee the deposits of small businesses as well (which the bank guarantees did actually do).

An extremely rough bottom line I guess is you are looking at some percentge of 128bn which the Government would have had to pay to avoid people losing everything.