We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed they hardly deserve to be covered by the guarantee.
Finance Minister Brian Lenihan has made a wise choice. By coming up with a unique, Irish plan — guaranteeing all deposits — instead of importing a failed solution from abroad, he has instilled confidence in the Irish financial system.
Most importantly, Irish banks are now safe. This is the single most crucial upshot of yesterday’s move.
Political and financial reaction has been positive and, encouragingly for the challenges ahead, when everyone else around him was losing their heads the minister kept his.
The financial markets abroad have taken the news very positively. This is doubly impressive when you think of what is going on outside the country. Granted the markets will be jittery and unstable for some significant time to come.
However, by drawing a line in the sand and by indicating that the sovereign state will do its job and preserve the system, the minister has shown real leadership.
We now have an anchor and the stability banks needed to sort out their own houses. The whole point of this is to get credit and loans back into the real economy as quickly as possible.
Nor should the guarantee come for free. The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.
One way of looking at these events — when sellers are attacking the Irish system — is to compare it to a military attack.
Time is of the essence. If the defences are crumbling everywhere — as they have been in the UK, Netherlands, Belgium and the USA — it’s no use mounting the same defences as those which have been overwhelmed elsewhere.
You have to insulate your own system first by using tactics that no one else has deployed.
Near term, this government guarantee obliterates the sellers who do not have Ireland’s national interest at heart.
Further out, it also buys us time to sort out our problems. (I’d have paid good money to see the faces of hedge-fund managers in London yesterday morning when they suddenly became conscious that their strategy against Ireland was in tatters and they realised that they stood to lose the millions they gambled against the Irish system).
We are not out of the woods by any stretch of the imagination. Indeed, some Irish banks have been so recklessly managed that they hardly deserve to be covered by the guarantee, but the choice was between the system or bust.
The minister obviously thought that by guaranteeing some banks and not others — as many of his advisers argued — he would open up the prospects of the weaker banks undermining the stronger ones. He has put the system first and this can only be a good thing.
As this column has argued before, there is plenty of time for recrimination. By keeping the banks liquid, the private sector will solve the problem of writing down bad loans, working with debtors to get the best deal and, most importantly, by doing all this in a controlled, not panicked fashion. When people are panicking, they tend to make the wrong decisions.
The nub of the minister’s dilemma was how to do something revolutionary that was quick, decisive and, most importantly, simple.
If we look at what the rest of the world is doing to try to stabilise their banks, we see all sorts of convoluted plans which amount simply to a large game of pass the parcel.
Every time a weak bank is passed on to a not-so-weak bank, market confidence takes a hammering and we are back to square one. The guarantee eliminates all this nonsense.
Now, we have to plot the next phase. How do we keep credit flowing in to those parts of the real economy which are productive? How do we accelerate the process of cleaning up the banks’ balance sheets and in time, and how do we punish those who recklessly got us into the mess?
But yesterday was for action not ideology; it was for stability not recrimination; and, most crucially, it was a time for practicality not complexity.
Over the course of the next few days, we are likely to see capital inflows into the Irish banking system as investors elsewhere seek the sanctity of a government bank guarantee as opposed to the uncertainty of a bank deposit, when it is clear that the banks are operating on the hoof.
Longer term, we can expect foreign banks to move here, setting up offices in Ireland and creating a banking industry which will thrive. We have set the template. The upside greatly outweighs any possible downside. The system is the most important thing at this stage. A threat can now, with the right accompanying policies, be turned into an opportunity.
In time, Brian Lenihan’s move yesterday will be seen as a masterstroke and a practical blueprint for the new financial architecture which will emerge from this global crisis.
David – thank you. Modesty is another virtue !!! Ireland has to rein in the reckless of the banks. And put a cap on all bank salaries, pensions and bonuses. The taxpayer should not be subsidizing the yuppie ethic. Ireland has to next do something about the competitiveness of our economy. Because we are losing jobs and business in this area. And if this continues, there will not be buyers for all those empty residential units. Therefore the private sector needs to be assisted ASAP. It is urgent. Because (once again) the private sector will be the engine to get… Read more »
David I agree about the modesty. Well done. Someone was reading your column. However this article eludes to the fact that you think Ireland is about to become some sort of banking nirvana like Switzerland. I dont agree. The whole of europe is probably going to have to do this (or something like) now too so we wont have that advantage for long I think. Furthermore I hope that our politicians don’t use this as some mechanism to bail out the builders/estate agents and make houses more expensive by pushing the banks to loan out wads of their newly found… Read more »
Very interesting article, in that it elaborates on some on the economic nationalism David has espoused in the past. Note the ‘Uniquely Irish solutions’ and and desire to see the London hedge fund managers suffer for shorting Irish banks. This follows on from some of the views in the past about perhaps Ireland needing to step back or at least not jump at every commandment from Europe. Im making no comment, but its an interesting side to DMW’s views, he obviously has a strong nationalistic streak, which is unusual to see in a trained economist, (maybe its not, but I… Read more »
->Ger Kennedy,
.. the rest of europe cant do it, their banking systems are too big. A bit like Irelands other piece of economic nationalism, the low tax rate. Other countries just cant do it, too much revenue would be lost. Good for us I guess. All credit toooooo being small.
David, Absolute rubbish! €400 billion is $580 billion and the US bailout is reputed to be €700 billion. But the US is a continent with an annual turnover in the region of $13,850 billion, 60 times more than this tiny island’s €160 billion. How do we actually back up a ‘guarantee’ of €400 billion? I would just like Brian Lenihan to try and understand that my part of the €400 billion ‘guarantee’ is already with the banks that I’m ‘guaranteeing’. Far from underpinning the Irish banking system and improving Ireland’s access to international funding, I think Brian Lenihan has merely… Read more »
David > We are not out of the woods by any stretch of the imagination.
But at least we have found a path.
The Bill is available to read now, it’s well worth a look.
http://www.oireachtas.ie/viewdoc.asp?DocID=10023
Hi David, > By coming up with a unique, Irish plan – guaranteeing all deposits –he has instilled confidence in the Irish financial system. Guaranteeing deposits of 400-500 billion is one thing, but the key aspect of this proposal (it is not yet enacted, it was a 1 page press release!) is that the LOANS the banks have received are guaranteed. Yes, it is perhaps unique and Irish as you point out, perhaps too much paddy-whackery, because like a badly written insurance policy, problems could come home to roost, very major ones. What it doesnt deal with and which is… Read more »
typo:
> the banks own probably a multiple of that
the banks OWE probably a multiple of that
Come on David, give yourself some credit here. The world and its dog knows you were the brains behind this, and for free too! Your most recent column told the minister what to do using words that a 4 year-old could understand, and he goes ahead and does it without even mentioning your name. I’m sure he’d claim it was just a coincidence, but the fact is you had a hand in this. Clap yourself on the back. Lenihan won’t.
Come on MK. Jouney of a thousand miles etc. One small step for a small island. You’re probably right in that the short sell SAS will probe again to find another weakness but for now we’ve repelled the attack. And attack it was. One thing about the Brits is if the Realm is threatened, they unite like glue. We could do with a bit of unity like that. Now we need to see IBEC step up to the mark and make up for their regulatory failings over the past collective agreements. The unions et al did their bit whilst the… Read more »
BTW David.
Large earthenware pots are available from http://www.gurupots.com
Congrats on a good shout.
CREDIT = HEROIN
What are you talking about? Can everyone stop the stupid simplistic metaphors to explain the crisis. I really dont need Money is like milk and the banks are the farmers and central bank is the co-op stupid metaphors to explain how an economy works. spare me please i cant take another one.
“Nor should the guarantee come for free. The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.” Now we need the follow through….. This is the area we are traditionally weak in….. but its critical that we start repairs ASAP. We need the state to start kicking people in meetings with the banks, if necessary doing their own audits, and seeing how legally to make senior executives personally obligated to fix this…. whatever… Read more »
David McWilliams should get the nobel prize for economics. well done!
Why you dont run for the Dail we could do with a TD like yourself!
Lets hope now they implement your other plans and give passports to Irish Ex Pats.
come on guys. gotta see if the guarantee works first. the way the markets are at the moment it would not surpise anyone who participates in it if they just ignored it. no bank is safe, anywhere.
Hi David, some clarification on a few points would be good. > hedge-fund managers … gambled against the Irish system – I thought shorting had been banned several weeks ago? – If this was a liquidity problem then why didn’t the banks just go the ecb? Apparently they will loan up to a certain percentage of the banks assets. Perhaps the ecb does not believe the valuations of houses and land on the Irish banks books? Is this really a solvency problem? – On the radio this morning the Irish Banks (the 6 covered by this I presume) were mentioned… Read more »
Index Value: 3,702.55
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So far so good???
Lenihan is like the Half-sozzled Manager of the Ballybobeen branch of the EC Bank, who’s just been informed by a fly-boy crony that his business is bust and his million loan spent on futile trash. “Och, sure we’ll see you right, Paddy; the ECB has plenty more where that come from. Ballybobeen would be a poorer place without entrepreneurs like your gracious self.” H-s M knows that ECB won’t audit his accounts for months yet, so there’s a fair chance things will pick up in the meantime. Even if they don’t, all its other branches are in equally dire straits,… Read more »
Tullaman > I thought shorting had been banned several weeks ago? Shorting of financial shares is banned, but hedge funds can still profit from falling prices, it just requires a little more imagination. It is still perfectly legal to short ETFs based on the Irish financial sector, for example. But Hedge Funds are on the rack at the moment. An article in the today’s FT highlights their woes “according to figures from Hedge Fund Research, the industry data provider, the hedge fund market is on course for its worst year of performance since at least 1990, when its records began”… Read more »
“The chastened banks will now have to accelerate their process of writing down loans, sort out bad debts, bring developers to book and repay the Government’s trust, not in their own interest, but in the national interest.” After all you have written do you actually believe this? Are you for real? Do you expect banking practices to change so radically? You are expecting the impossible, the politicians are in bed with the Bankers and so called financiers……..they are bailing out their buddies and using the taxpayers money, the very people the bankers, builders, property speculators and other ‘esteemed’ money men’… Read more »
This was a good short-term move and typical of our decision making. We need a very serious crisis to get policymakers’ attention. However, as the international recovery is likely to be gradual from 2010, there will be no early dawn for developers with big debts. Given that the likes of Sisks are tendering for the reduced number of projects: big and small – and ones that they would have never have considered a year ago – means that many developers cannot trade out of their problems. Fear of unemployment in the private sector will keep a damper on housing demand… Read more »
Ballsy, Innovative but VERY risky.
All the country’s chips are down in one bet.
If it works then history will judge those involved accordingly.
If it doesn’t work and 4m of us are given a 100k bill for our play then we’re looking at mass emigration on a scale not seen since the 1840’s.
Although it’s a phrase that makes most right thinking people shudder, “This time it’s different” is appropriate in one way. The Republic doesn’t have it’s own currency. Were the US or UK to try this, the currency markets would respond with a huge raspberry, as it’s clearly making a promise that can only be kept by enormously inflating the currency. If Germany or France were to try it, it would probably damage the Euro, for the same reason. But the Republic? A few hundred billion Euros is neither here nor there to the currency. Future debt is tomorrows problem, the… Read more »
Given that the Government and taxpayer have saved the banks. do you thing the bank will do the right thing and stop protecting their developer mates?.
But won’t this be shot down by the EU competition authority? Apparently one senior British banker has said, “If this is legal, then I’m a banana”
The problem of having an overvalued currency and a grossly inflated commercial and residential property sector still hasn’t been solved.What happens to Irish businesses if sterling depreciates by 10% against the euro?.Do I get a bail out as well?.The correct strategy-ditch the euro and set interest and exchange rates that suit Ireland.Pity it wasn;t done a decade ago !.
James Corbet > But won’t this be shot down by the EU competition authority? Apparently one senior British banker has said, “If this is legal, then I’m a banana”
The one thing that stands out from reading the bill for me is the amout of discretionary power it gives the minister.
Such powers have proven unconstitutional in the past, and if they are not tightly constrained they will leave the bill open to legal challenge.
Is there a real risk that money deposited in Ireland will become worth less in the real world as a result of this? e.g. will it accelerate inflation or drive down the value of the Euro?
The French are now considering a similar tatic to the Irish…if the trend continues then the rest of Europe could follow. In essence, the banking runs/collapses/bail-outs will come to an end, but the monetary system will still be paralysed by the underlining problem – bad debt. Ultimately, when the government gets its teeth into these banks via the proposed deposit guarantee what should happen is wholesale writing down of bad debt and a car boot sale of property. If the rest of the EU follows, higher interest rates are on the cards (how high is anybodys guess). Expect a lenghty… Read more »
christophe villa > The correct strategy-ditch the euro and set interest and exchange rates that suit Ireland.Pity it wasn;t done a decade ago !
You seem to be an adherent of the Michael Foot school of economics.
Have you heard of Iceland – another European open economy?
The benchmark interest rate is 15.5% and inflation is 14% because of the dive in the currency.
Ireland is more dependent on foreign direct investment than any other developed country. So exiting the euro would be the equivalent of a national suicide note.
There was an argument Tuesday night on Prime time between commentators on the amount of bad debt on the Banks books. The pessimistic commentator stated that it was very large. The optimistic one that it was around 5bn euro. Richard Bruton on Morning Ireland this morning reported that the banks had 80bn euro of loans in intensive care, thereby rubbishing the optimist on Prime time. In addition if the government guarantee does not extend to an overseas bank then it effectively rules out any non irish institution buying any of the 6 banks for the 2 year period. They can… Read more »
Timing is key here and a good sense of open and transparent ethics. Reading the history books around the depression is actually very scary. I think people need to understand very clearly what is meant by a political collapse and economic collapse. This is just not a case of people loosing jobs and having to live on bread and water for a few months while they try find another job. This is dangerous territory where there is institutional collapse. No police, health or educational systems. So conceiving of economic collapse is just not an option. I think David is right… Read more »
Well fair play to you David, the highest paid prime minister, minister for finance and central banker in Europe have taken your advice. Not a bit of gratitude from them, of course, but if things don’t work out and the poker bluff fails, they’ll be sure to say twas your idea, guv. I can understand the rationale behind this Bill, and I would prefer Brian Lenihan anyday to his two predecessors at Finance, but I can’t say I’m happy with it. I find it mentally impossible to admit that it was done for the benefit of the general economy and… Read more »
Comment by Philip, October 1st, 2008 at 2:45 pm
seriously what world are you living in? its not the 1930s. Nazis are not going to take over the EU. the world has moved on in the last 80 years!
I think this is a great move. However nobody has asked the questions about how was this allowed to happen. We have the regulations but they appear to not have been applied correctly if at all. From the Irish Financial Regulators report from 2007 comes the following “Total remuneration paid to the Chief Executive for service during the year ended 31 December 2007 was €260,857.” €260,000 of our money and nobody has asked questions of the regulator’s role. I have not heard a peep. Apart from that, is it not the case that it was ordinary people who borrowed more… Read more »
Jan Good point. Where was the regulator? Liar loans as they call them were a big part of this mess everywhere. In the US they were officially called “no doc” loans but they became known as “liar loans” because people just made up how much money they made so that they could “afford” the repayments. This was all done with the “realization” that the property would be worth much more in a few months when you sold it and therefore there was no problem as long as you could make the payments for a few months. This was all done… Read more »
Malcolm McClure – you are more correct than you may realize concerning the half sozzled analogy and certain members of the cabinet. The reality is quite alarming. But this is Ireland, so you will never see the truth on a newspaper in the morning-the law on ‘right of good name’ is biased in favour of the coverup artist. Irish people and banks have had a rather one-sided relationship. The banker has been telling lies, abusing trust and doing whatever he likes. Meanwhile the citizeness is at home keeping the household in good order, whilst being abused on a wholescale manner.… Read more »
Bravo, Davo… Now, it is very important to have faith in people. I believe this faith perpetuates itself… But, can we really convince the right people to act in the ‘national interest’? They must. Yet, it seems to me that institutionalisation often runs so deep… Are these people capable of acting in the national interest? I believe they can…
Deco,
I’m with you 100% on that. Those bankers need the smugness beaten out of them – not in the literal sense of course.
Jaysus its busy in here! Forget this game of smoke and mirrors…moving the furniture on the titanic etc.etc. , get ur hands on some gold and diamonds……things that mankind valued before paper, plastic and a good credit rep (what ever that constitutes) coz when ur out in the streets fighting with ur neighbour for the last loaf of bread in the shop these are the commodities that will help u out if u aint a scrapper. Just kidding……….I hope
Well done David….one of the enlightened
This will succeed only if Germany says so, and then we have to pray the euro maintains stability.
Otherwise Ireland is insolvent and headed for bankruptcy.
The problem is not liquidity. It’s not about finding time to get over a hump.
The problem is insolvency amongst the banks. Despite all the “interventions” from central banks and treasuries, despite all the cheesy metaphors from business journalists, the market will work relentlessly to solve that problem.
Kevin, clearly you’ve not seen much of the world and how events can change rapidly for the worst. I was in Zimbabwe shortly after it transitioned from Rhodesia. It was modern, well run and full of all the creature conforts typical of a 1st world 1980s modern economy. Look at it now.
People are only a few salary cheques from poverty and this applies to the majority of people – except for the well off few.
Ireland’s economic fabric is very fragile as has been well pointed out. We simply cannot afford mistakes
Very clever move from the Irish Government – again this proves that we are slick and as usual, we Irish will always stand up for each other in times of crisis.
What do people think about the cheek of G Brown to ask us to comply with EU rules? They’re jealous that they cannot act due to their sheer size. Also they are peeved that their UK companies are moving to Ireland for tax reasons. The UK are complete Euro sceptics – the cheek of it! Why cant they just admit that the Paddys are just smarter than they are!
I await (with interest) the reaction to this ‘daring’ Irish initiative over the next few days. Already there are, quite rightly, discordant noises from the EU competition authorities (and British Bankers) as to the legality of this move – never mind its’ probity and ethics. Assuming there is a flight of capital from other European countries to Irish Banks: Then the governments of other countries will have no option but to match the Irish move. A zero sum game may thus unfold which will do nothing to address the underlying systemic crises in liquidity and solvency. No doubt retail depositors… Read more »
I don’t know David, if this is really such a great move now the other banks want a stake in this insurance scheme. Considering the speed with which it is been put into legislation is what has me worried , less than two weeks ago Mr Patrick the banking regulator said our banks were safe, then he calls Mr Brian Finance on Sunday to help his mates, this is well scary. When all these banks assets are over valued, if Mr Brian Finance fixes a premium for these banks to pay, what’s to stop them paying a few premiums ,… Read more »
The government has lived up its billing.
Yesterdays answer to tomorrows problem.
David > there is plenty of time for recrimination. There is always time for blame. I have been looking for the causes of this crisis (both Irish and international) and I think I have found two likely suspects. What follows is only slightly tongue-in-cheek. Firstly, the international credit crisis. It seems to me that the globalisation of regional banking problems can be blamed on Credit Default Swaps, the mechanism used by banks to reduce their individual exposure to ‘suspect’ debt. But where did these CDS come from? The answer is Basel I, the 1988 agreement among G-10 central bankers to… Read more »
[…] Strangely, "told ya so" appears nowhere in McWilliams’ Indo column yesterday. Lenihan’s masterstroke has bought us time to sort out our own problems David McWilliams Archi… […]
This makes interesting reading. Potentially unintended consequences.
http://www.irishtimes.com/newspaper/opinion/2008/1002/1222815457103.html
Ger
Of particular note in previous noted article “The particular risk that the Government now faces is that Irish banks will package toxic loans as asset-backed securities and sell them off with a Government guarantee, passing on their losses to the Irish taxpayer. Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan’s signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking… Read more »