OK, so are you saying that the reason anglo wasn't allowed to become insolvent was to avoid a flood of commercial property being put on the market that would lead to a reduction in values so large that other Irish banks might also become insolvent?
I think Lenihan said that multiple Irish bank insolvency would have left bond-holders out of pocket and would put them off buying Irish govt bonds in future. Is this the systemic risk that is mentioned? Or is it the cost of compensating retail depositors through the guarantee scheme?
I find it hard to imagine a situation worse than the one we're in. Am I wrong? Is there a worse situation that we have avoided?
Yes, both are true.
I think the commercial property thing, though, is the more significant. There is nothing hard to value about commercial propery. The banks are not stuffed with assets that are difficult to price. They are stuffed with assets that they don't like the price of and don't want to recognise that price. An Anglo firesale would have recognised that price beyond doubt (it is not just the Irish banks that are in this position, the UK and US banks are stuffed with commercial property assets that they are holding at par, despite falls of 30-60% in commercial property indices). It would have meant immediate book losses on the banks (at year end, anyway) resulting in insolvency. The guarantee and keeping Anglo alive kicked the problem down the road.
The appearances are that foreign investors have fled Irish bonds anyway, preferring the massive issuance of their own governments, despite what the government has said. The NTMA has not published statistics on the purchasing ratio of Irish bonds since 2006. There has never been a breakdown, as far as I can see, between institutional and Central Bank purchases (unlike, for example, the Fed which produces regular reports on what sector is buying it's debt).
It is also disingenuous to confuse sovereign debt and corporate debt. They are rated under different systems. A AAA bank rating is not the same as a AAA country rating in not the same as a AAA structured finanace rating. All is says is best in class. So the idea that sovereign bond buyers would shun Irish bonds because an Irish corporation defaulted on it's bonds is at best disingenuous and probably just a lie. At the time of the guarantee, there was no government backing, implied or otherwise, for the banks. The guarantee at the time was, I believe, capped at €20k (?maybe that had changed earlier?). In fact, the guarantee and the likely costs of the Anglo nationalisation have decreased the attraction for Irish government debt, so saving Anglo has had the opposite effect to Mr. Lenihan's stated reason for saving it. Note, I use the word 'stated'.
A worse situation? Well, it depends on who you are. If you hold Anglo debt, you are laughing. You have gone from cents on the euro to being made whole. If you wrote insurance on those bonds, you are also money good. Who else? Um, the other banks, the developers who were in arrears who have not been liquidated, the golden circle, the Anglo Directors, (possibly anyone foolish enough to have over the deposit limit in Anglo?)... the list goes on...