WHEN I hear the new boss of Anglo urging the Government to extend the bank guarantee, I know the right thing to do is precisely the opposite. Put in its most simple form, what is good for Anglo is bad for Ireland.

The only course of action is to close this thing down, together with Irish Nationwide, as soon as possible. Nobody will miss either, once depositors — particularly of Nationwide — are looked after. Looking after depositors is easy to do. Believe me: we will miss Hector Grey’s more than Anglo.

We are being presented with the usual line that “there is no alternative to saving Anglo.” And now the EU Commission has given its permission for our Government to continue to spend your money bailing out Anglo.

Well thank you, but it’s not your cash, Mr Commissioner, it’s our cash. The EU is doing this to save itself the embarrassment of a bank failure on the margins of Europe. But there is an alternative to the present policy and it is an alternative that was discussed when the guarantee was introduced.

During informal chats about the guarantee before it became policy, the scenario was envisaged that one or two of the banks might be total basket cases and a plan for this ‘worst-case scenario’ was hatched.

The plan was simple: the guarantee would be allowed to lapse and any such distressed bank would be closed down, with its creditors taking the hit.

Once the guarantee was lifted, the defaulting bank would then become a defaulting bank within the ECB’s remit. Given that most of the creditors were other banks in the ECB’s empire, the situation becomes a small European problem.

Back then, in September 2008, Ireland faced two choices: either we had a run on our banks — which would have seen the small depositor lose because the big guys always get out first — or the other choice was that we did something dramatic, but temporary.

Looking at what had been done in Sweden and Switzerland in similar crises in the early 1990s, it seemed that if we wanted to stop the immediate crisis, then a blanket guarantee was necessary.

However, aware of the risk that the banks might use this in the future to suck money out of the State and, in so doing, threaten a bigger fiscal crisis, it was crucial that this move had to be temporary. The guarantee has done its job, it prevented a chaotic run on the banks. But now we must get rid of it.

In general terms, prolonging the guarantee — no matter what the circumstances — risks a fiscal meltdown where Ireland becomes not so much a country with a banking system but a banking system with a country stuck on to it. This will lead to a Greek-style fiscal crisis, arriving at the same end point by different means.

In the Greek crisis, a sovereign-debt crisis became a banking crisis because the banks had lent so much to the free-spending Greek government. In Ireland, a banking crisis will become a sovereign-debt crisis because a prolonged guarantee puts us all on the hook.

With hindsight, there are those who argue that maybe it would have been better to let the banking system collapse. However, when faced with a dilemma and if you are asked your opinion, you need to take the view that a plan is better than no plan at all.

The plan back then was to shore up the banks by ‘lending’ to them — not giving to them — the credibility of the Irish State for two years. During those two years, we would have time to see how bad the situation was and then, having assessed the situation, we would act.

Either we have banks that were decent enough to be recapitalised by the financial markets — in which case the guarantee would have worked — or we would have basket cases, in which case the guarantee would be used as a shield behind which we could do an adult deal with the creditors and close the banks down in an orderly fashion. Clearly, if a bank can’t raise capital on the financial markets on its own, it ceases to be a bank and should be closed.

That second option involves getting the creditors of the banks in a room and telling them the Irish people have no interest in propping up the banks any more. We would have to buy a deposit insurance policy from a large international insurance company (which big one wouldn’t like such a huge slice of business?) and away we go.

A ‘sweetener’ in such a deal for the creditors (who were silly and greedy enough to lend to the Irish banks back in the boom) could be a debt-equity swap, whereby we turn the creditors of banks into shareholders. This is a ‘normal’ way of dealing with banking failures in a system you might have heard of — it’s called capitalism.

So this is what we have to do now and there is still time. Yes, there will be fights and certain people will complain. These things are never entirely amicable. No one likes losing money but the creditors have to pay.

Once the guarantee lapses, a default by the Irish banks becomes a simple corporate default. These things happen all the time.

In the short term, there may be some impact on credit availability but this will be temporary as the European Central Bank is still injecting money into the system. Moreover, when a newly cleaned-up bank or banks emerge — as will definitely be the case — credit will flow much more freely. If we are to stay in this monetary union, we might as well use the damn thing by giving the ECB a call and asking it to facilitate this orderly wind-down.

In terms of credit flowing to small businesses, the guarantee, by contaminating the flow of new credit with the toxicity of old debt on the balance sheet of the banks, might actually be hindering credit flows. Getting rid of it makes the credit picture much clearer.

This sequence of events was envisaged in the original plan, had the guarantee revealed the worst. Now we know with Anglo, Irish Nationwide and AIB that the worst-case scenario is the reality. Things are only marginally better at Bank of Ireland. So why not stick to the plan and close the banks down, with the Irish State acting as broker, not principal?

This would be done in an orderly fashion with no panic or chaos. Someone will buy the banks once the deal with the creditors is done. Who wouldn’t buy the banking system of a small European country once the hard decisions are taken? We can then use their capital to recapitalise the country.

We are told that there is no alternative. There is — you have just read it. It comes straight out of the capitalist manifesto for dealing with bust banks.

There is still time to act. Let the guarantee lapse and accept the consequences of large corporate defaults in Ireland. The rest of the financial markets expect some sort of default here, so why does our Government remain in denial? Accept the reality and move on.

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