Why Ireland’s 2008 Blanket Bank Guarantee Decision Was Taken?

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There seems to be a myth doing the rounds at the moment that the 2008 Blanket Bank Guarantee, which ran for 2 years from September 2008 until 2010, wasn’t put in place to simply stop both Anglo Irish Bank and Irish Nationwide from collapsing in order to protect, as far as possible, the considerable interests that a small group of Irish people had in those cauldrons of greed and corruption.

Rather, popular thinking now goes, the notorious guarantee was put in place because of pressure from the ECB who were eager to ensure that revenue from Irish taxes would be used to pay bondholders in the banks of Core EU countries in full.

Take this recent article published on the 27th of March last which has the headline: “Germany’s rethink on just where the blame lies for the Irish bank bailout”. The implication behind the headline is that the bailout was required because of the guarantee, but also suggests that the statement made by the German Finance Minister that the Irish guarantee was a solely Irish initiative is a ‘rethink’, that is, an attempt to change the narrative that the bailout, and the guarantee that made it inevitable, was dictated by interests of big German banks.

“It was the Irish government that imposed the farthest-reaching guarantee for its banking system at the start of the crisis – on its own initiative,” said German finance minister Wolfgang Schäuble.

The statement itself was prompted by comments made by Irish politicians while negotiating on bank debt. Such comments, of course, are tailored to an Irish audience who are increasingly convinced that the enormous and unsustainable burden of Irish bank debt which the residents of Ireland are being forced to finance is being imposed by the ECB and Germany in order to protect their own struggling banks. This particular framing of the story feeds into the tale told about Timothy Geithner’s phone call and the posthumous yarn about the letters Brian Lenihan received from Jean-Claude Triche.

These Irish politicians are entirely aware, however, that the decision to provide such a broad guarantee was made without the advanced knowledge of the ECB. It is a consequence of this decision which was only put in place to maintain access for Anglo Irish Bank and Irish Nationwide to the interbank market that the vast majority of bonds have been paid off in full.

We know this because on the 3rd of Oct 2008 the ECB published an opinion on the Irish bank guarantee. Here’s the relevant excerpt.

“As a further general comment, the ECB notes that the Irish authorities have opted for an individual response to the current financial situation and not sought to consult their EU partners. In view of the similarities of the causes and consequences of the current financial distress across EU Member States and the potential interdependencies of policy responses, it would have been advisable to properly consult other EU authorities on the envisaged legislative plans.

2.5 A further point relates to the risks to the Government’s budgetary position arising from any financial support to Irish credit institutions. While the ECB appreciates that any guarantees provided by the Minister under the draft law would be contingent in nature, given that the financial exposure of the Irish State under such guarantees is potentially very large, the Irish Government could be obliged to make significant payments in case these guarantees are called over the next two years. At a point in time when the Irish budgetary position is deteriorating and may risk exceeding the 3 % of GDP reference value for public deficits, as specified under Community law12, this is a cause for concern, even when the provision of financial support would, under the draft law, as far as possible ultimately have to be recouped from the credit institution or subsidiary in question.”

More to follow.

 

2 Responses

  1. Ellie Kesselman

    April 20, 2013 10:16 am

    “Such comments [by Irish politicians], of course, are tailored to an Irish audience who are increasingly convinced that the enormous and unsustainable burden of Irish bank debt which the residents of Ireland are being forced to finance is being imposed by the ECB and Germany in order to protect their own struggling banks.”

    Ah! Don’t you know? Placing blame on powerful, implacable foreign interests is a perennial favorite!
    ~ It serves the purposes of politicians who are eager to distance themselves from the consequences of their (mis-)deeds;
    ~ It allows citizens to deflect responsibility for bad outcomes away from their elected leaders, and others who hold positions of authority and public trust,
    ~ Thus the people are spared disturbing self-introspection, for electing leaders who behave in ways that are inconsistent with the health of the nation and the well-being of its citizens. I am not adequately familiar with the political system of Ireland to know if my prior sentence is accurate. It is with what I am familiar in the U.S.A., not that we choose wisely.

    How grievous would the consequences have been had Anglo Irish Bank and Irish Nationwide lost access to the interbank market? I doubt that it would have been as burdensome to your economy as the choice that was made, in order to maintain access, but I’m not well-informed enough to know.

    * Sometimes, I wonder if anyone bothers to read PDF documents at all.

  2. emerald

    May 6, 2013 7:22 pm

    cannot comprehend that last paragraph.
    But the part about: “As a further general comment, the ECB notes that the Irish authorities have …. ….. … … not sought to consult their European partners.”
    sounds a bit like ‘European-speak’ to me, in that, the ECB is not actually saying that they were not consulted.