There is a tendency these days in articles by right-wing TDs and libertarian economists in particular to talk up how the Troika bailout was not provided for the Irish people to pay for schools and hospitals during a financial crisis but was provided simply to pay back French and German banks for the money they lent Irish banks during the credit bubble. Further that by the unwillingness of the ECB to reduce that debt we are forced to pay in full for mistakes that are not the responsibility of the Irish people. For example, Mario Dragi’s response to Gay Mitchell’s question in the European Parliament:
“It’s too easy to think that the ECB can replace governments’ action or lack of it, printing money. That’s not going to happen”.
Now, while there is a great deal of truth in the injustice of the matter, it neglects one important aspect as far as I can see. It follows the narrative that the Irish political establishment has no hand or part in this dreadful imposition. Ultimately it suggests that the pressure we are being put under comes exclusively from an external authoritarian source – the IMF/ECB/EU Troika. There is no mention of the fact that the imposition of the bailout in order to pay back French and German bank losses in full was imposed on Ireland because of the nature of Ireland’s blanket bank guarantee.
To begin with its clear that there is no way that Ireland could have put in place such an incredibly broad guarantee unless Ireland was part of the Euro. Such a guarantee would have been useless if we had our own currency. Now the history of the Euro currency tells us that it was created with all its magnificent flaws to provide competitive advantage to principally the French and German economies that required a larger ‘domestic’ market without the additional costs and risks of currency exchange. So, the Irish bank guarantee took an almighty dump on a currency that the core surplus countries had worked so hard to create, and which they needed to remain in its over-valued (ie strong) state.
The main problem, however, with the guarantee was the inclusion in it of Anglo Irish Bank. Now, I realize that the details of this have been poured over a thousand times, but it strikes me that very little is understood about what the guarantee, and the inclusion of Anglo Irish Bank actually amounted to. I am not in a position to explain it expect to point out that the inclusion of Anglo meant that, unexpectedly and against all sense, Ireland guaranteed not retail banking, as other countries did and would do, but the shadow banking system.
In order to understand this it’s worth reading (again?) Patrick Honohan’s report on the banking crisis which includes lots of fascinating detail on the guarantee (see pages 128 – 134). Ultimately I don’t agree with Honohan’s argument that in the circumstances the Irish government did the right thing to include Anglo. But as is often the case with reading Honohan his analysis is thorough, he presents all the facts and even gives a decent snapshot of the literature, which allows you to ask the right questions.
“No other country had introduced a blanket, system-wide, guarantee, though this has been a relatively frequent tool in previous systemic crises (Box 8.3). As such, the Irish guarantee caused considerable waves, upped the ante for other governments struggling to maintain confidence in their own banking systems, and placed some direct competitive funding pressure on banks in the UK, where the liquidity position of some leading banks was much more critical than was known to the Irish authorities at the time.
The scope of the Irish guarantee was exceptionally broad. Not only did it cover all deposits, including corporate and even interbank deposits, as well as certain asset backed bonds (?covered bonds) and senior debt it also included, as noted already, certain subordinated debt. The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options. Arguments voiced in favour of this decision, namely, that many holders of these instruments were also holders of Irish bonds and that a guarantee in respect of them would help banks raise new bonds are open to question: after all, extending a Government guarantee to non-Government bonds has the effect of stressing the sovereign to the disadvantage of existing holders of Government bonds; besides, new bonds could have been guaranteed separately. The argument for simplicity also is weakened significantly by the fact that an actual dividing line between covered and non-covered liabilities was drawn at as least an equally arbitrary point; moreover, such instruments were held only by sophisticated investors.”
Which begs the question, why then was the guarantee broad enough to include them? After all, not everything was included, and as Honohan points out elsewhere ELA funding for the pillar banks would have solved their liquidity problem in weeks after the decision ultimately to guarantee everything was taken.
The notes and boxes are worth reading too. This one is from the comparison of the Northern Rock guarantee, which was refereed to constantly as the template for the Irish action at the time, and the Irish Guarantee
“Unlike in the case of the Irish guarantee of September 2008, the Northern Rock guarantee extended only to existing and renewed wholesale deposits; and uncollateralised wholesale borrowing. It did not include other debt instruments such as covered bonds, securitized loans and subordinated and other hybrid capital instruments.”
And how the huge cost out the banking crisis, and subsequently the requirement of the bailout itself, came about:
“Studies have shown that blanket guarantees have typically been associated with crises that resulted in larger fiscal costs which in turn reflected the underlying gravity of the situation that called for such a drastic step. However, there are indications that a regime that is prone to introducing a blanket guarantee is also more likely to have been associated with less adequate regulation that can result in large banking and fiscal losses.”
So, while its fun to characterize the ECB and the IMF as the bad guys in all this we have to realise that, given how there has been absolutely no systemic change since the guarantee, that its the lads and lassies who are running the show here that we should be going after.
Update from Conor McCabe over on Dublin Opinion
It’s one thing for the Irish moneyed class to say that the ECB forced them into the 2008 bank guarantee, it’s another for progressives/leftists to fall for it. From Der Spiegel, 2 October 2008:
“Mention of the plan infuriated many across the EU who feel that the action will unfairly draw money away from other banks and toward the presumably safer Irish institutions.
As an alternative to such unilateral responses, French Finance Minister Christine Lagarde suggested the creation of a “European safety net.” Fearing that it would be forced to make the biggest contributions to any such mechanism, Germany responded harshly to the suggestion, with Chancellor Angela Merkel saying that Germany “cannot and will not issue a blank check for all banks, regardless of whether they behave in a responsible manner or not.”
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