Thanks for clarifying that. Makes sense now.
I still like the Swedish solution! ;-)
Europe is now saying that countries shouldn't act unilaterally in this crisis. Will be interesting to see if they can impose their will on this one.
D.
Government guarantees all deposits in Irish banks
- Thread starter Brendan Burgess
- Start date
Thanks for clarifying that. Makes sense now.
I still like the Swedish solution! ;-)
Europe is now saying that countries shouldn't act unilaterally in this crisis. Will be interesting to see if they can impose their will on this one.
D.
Yeah and Brown is going on about competition laws. Strange how competition laws didn't seem to matter when he forced the marriage of Lloyds and TSB and allowed Nothern Rock to operate with a state guarantee (and allowed them compete against Irish banks here). Lenihan was right to tell them all to butt out. Until they come up with a European wide alternative, we have to take responsiblity for our own banks.
Duke of Marmalade
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This is all baloney about a €400Bn taxpayer risk. If Bord Failte were to guarantee American tourists that the lakes of Killarney were really there would we be assessing the costs in the event that they disappeared?
The vast bulk of that 400Bn is as safe as houses
eek and as certain as the lakes of Killarney. If the 400bn vanishes then the Irish taxpayer has lost everything anyway irrespective of the governement guarantee.
The vast bulk of that 400Bn is as safe as houses
eek and as certain as the lakes of Killarney. If the 400bn vanishes then the Irish taxpayer has lost everything anyway irrespective of the governement guarantee.This guarantee makes sense. The banks can now borrow at rates akin to the government and they can stay liquid. Confidence was dwindling in Irish banks and money was getting very expensive.
As S&P said this morning "Term senior debt issuance falling within the scope of a timely guarantee covering the full tenor of the instrument could be raised up to the sovereign credit rating on the Republic of Ireland".
Irish banks were borrowing at 20+bps above interbank rates and the margin was increasing daily. This is a simple and timely solution.
Afterall HBOS held on when they were paying a 25bp premium. The lending rate sky-rocketed overnight and the bank crashed. This was going to happen to at least 2 if not 3 Irish banks on Monday night. I hate to say it but it's true.
This move costs nothing up front, and solves the number one crisis in Irish banking - confidence. They are not “bailing-out” anyone – they are guaranteeing/underwriting the debts. Ok if a bank still goes to the wall it will cost billions but this measure will strengthen the banks and should avoid exactly that scenario.
As S&P said this morning "Term senior debt issuance falling within the scope of a timely guarantee covering the full tenor of the instrument could be raised up to the sovereign credit rating on the Republic of Ireland".
Irish banks were borrowing at 20+bps above interbank rates and the margin was increasing daily. This is a simple and timely solution.
Afterall HBOS held on when they were paying a 25bp premium. The lending rate sky-rocketed overnight and the bank crashed. This was going to happen to at least 2 if not 3 Irish banks on Monday night. I hate to say it but it's true.
This move costs nothing up front, and solves the number one crisis in Irish banking - confidence. They are not “bailing-out” anyone – they are guaranteeing/underwriting the debts. Ok if a bank still goes to the wall it will cost billions but this measure will strengthen the banks and should avoid exactly that scenario.
This is all baloney about a €400Bn taxpayer risk. If Bord Failte were to guarantee American tourists that the lakes of Killarney were really there would we be assessing the costs in the event that they disappeared?
The vast bulk of that 400Bn is as safe as houses
I think everyone accepts that the €400 billion figure is purely theoretical but I wouldn't be as convinced as our government that no part of the guarantee would ever be drawn on. But only time will tell. I take your point though. The figure is headline grabbing but is not really relevant. What really matters now is the value of the bank's assets.
Something like this had to be done and I admire the Government and regulator thinking outside the box and being pro-active rather than reactive.
"Outside the Box" thinking alright - particularly when they have allowed banks loan masses of money,100% mortgages, interest only mortgages to people who basically cannot afford to buy and also cause (partly) the artificial fuelling and bloating of house prices in Ireland for the last 10 years.
Bit late for "Outside the Box" thinking!!!
"Outside the Box" thinking alright - particularly when they have allowed banks loan masses of money,100% mortgages, interest only mortgages to people who basically cannot afford to buy and also cause (partly) the artificial fuelling and bloating of house prices in Ireland for the last 10 years.
Bit late for "Outside the Box" thinking!!!
Apart from ranting on about the obvious have you any constructive contribution? What other credible alternatives were there, in your opinion?
I agree but thats a seperate issue for another day. At the end of the day the Government found itself in the position on Monday night that Anglo Irish Bank for one was unlikely to survive another 24 hours if it couldn't access short-term funding. The Government could have let them go and nationalised them and then moved onto the next bank with problems like the UK but instead decided to use a systematic approach. Whatever about the rights and wrongs of it, it was a brave move that I reckon most other European Countries are today examining to see if they can follow. The Government will live or die by the decision but at least they made one and showed some leadership (for once).
The issues you mentioned above are all valid points and I am sure our very competent
rolleyes opposition parties will be mentioning over and over again once things calm down!Duke of Marmalade
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The problem in America is that they have a presidential election next month. If we had a general election next month would the government have been so brave? The 100K thing was popular especially with those who benefited, but the general feel I get is that this latest extension is perceived as a bail out of fat cats.
The fascinating conundrum is how does the Government charge for it? It might cost nothing, it might cost a bomb. We do not have a historical statistical database for assessing the probabilities. The price put on Irish bank risk by the capital markets is wholy unreliable, they have simply ceased to function in any rational fashion.
Anyway, say we knew that the risk of failure was 1 in 20 and the average loss in event of a failure was 20Bn. That's an insurance cost of 1Bn. But what's the point of charging 1Bn, it would be a drop in the ocean if the "insured" event came to pass, and meanwhile making that charge could make matters worse.
The fascinating conundrum is how does the Government charge for it? It might cost nothing, it might cost a bomb. We do not have a historical statistical database for assessing the probabilities. The price put on Irish bank risk by the capital markets is wholy unreliable, they have simply ceased to function in any rational fashion.
Anyway, say we knew that the risk of failure was 1 in 20 and the average loss in event of a failure was 20Bn. That's an insurance cost of 1Bn. But what's the point of charging 1Bn, it would be a drop in the ocean if the "insured" event came to pass, and meanwhile making that charge could make matters worse.
Isn't that why the Swedish solution of taking a stake (through nationalization) and then making a killing later by re-privatizing the bank(s) is the most efficient way?
At least one of these six barks and wears a collar, probably more than one. Nationalizing it will at least permit it to be run responsibly.
Does anyone here give a damn if this meant foreclosing on one or more of the fat cats who borrowed money from these dogs, to buy land on which not a sod has been turned in some cases? I certainly don't.
Oh, but hold on a second: Isn't it the same fat cats who fund our political system? Sorry, I forgot that.
D.
The action they took was correct on monday - i wasn't disputing that - its there lack of action while filling their bellies and courting the Developers in the FF Tent at the Galway Races for the last 10 years..that annoys me.
Had they been as vigilant and even thought outside the box a bit more we wouldn't have so many ordinary people up the creek to put in mildly. While the Banks leading staff do not suffer at all.
Was it not this lack of vigilance and greed that caused so much (not all) of the issues with sub prime lending/credit crunch etc in the states which started this whole disaster.
It is embarrasing to hear the minister for finance announce to the nation that he was up until 4.30 am throwing together a "bail out" package for the banks which for weeks they have denying would ever happen
I really can't get my head around this Government guarantee for (certain) "Irish" banks. In a globalised world is it meaningful to ascribe nationality to banks. Can't depositors (private and commercial) from anywhere deposit in, or borrow from, "Irish" banks (subject to AML) - are we Irish taxpayers now guaranteeing the whole world. Scarey times.
I'm not sure why there seems to be a consensus that this was the correct or even a reasonable response from the government. The more I think about this deal the more it stinks.
It is simply a fact that at least one (perhaps two) of the banks are insolvent and have more liabilities than assets on their balance sheets; the markets knew this and thus their share prices were heading rapidly to zero.
This is the fundamental issue here as far as I am concerned and instead of dealing with the reality (that these banks are simply bust) before any more contagion can happen, the government has been duped by banking executives into leaving them with complete control of a what is effectively a blank cheque. The insolvent will not only be allowed but will be aided in persuing savings from punters and other financial institutions (who will be delighted to effectively lend money to the Irish government at rates much higher than they could through the bond markets) in a desperate attempt to "trade" their way out of the mess they are in. I think we can safely assume that the executives which drove the banks into this sorry state during a boom period will fail miserably to trade their way out of it during a recession.
To use an analogy, what do you do with some-one who you suspect is deep in negative equity with their home and who is struggling to keep up with their mortgage payments who for some reason you cannot allow to go bankrupt? About the worst thing you could do would be to guarantee their liabilities unconditionaly allowing them to rack up extra loans and put new TVs and holidays on their credit-card (although this would undoubtably be popular with the person you are trying to help and they are likely to promise that they'll mend their ways and come up with someway to close the gap). Instead the first thing you do is get the house revalued at current market rates, you look at the size and cost of ALL of their debts and then calculate the shortfall between their wages and the cost to sevice their debts. If necessary, the house may have to be sold (though there is no reason to rush) and the money used to pay off as much of the mortgage as is possible and demand a chunk of their wages before taking on the remaining debt yourself.
So where exactly are the banks going to find the profits over the next two years to shore up their capital base? It's all very well taking in depositors money and flogging bonds to other institutions but these activities do absolutely nothing for a busted balance sheet. It's the height of financial naivity to think that profits of this magnitude can be magiced out of an Irish economy especially when the most optimistic don't see growth returning for another year or so.
You can be 100% sure that the inevitable will eventually occur and the government will be forced to step in to sort out the mess left by a collapse. Unfortunately this measure means that the problem is likely to be much much worse when it does happen as a result of this guarantee with billions extra worth of savings and bond holders to be compensated.
If this measure simply deferred the moment of reckoning, then I would perhaps consider this head-in-the-sand approach to be cowardly but perhaps not damaging. Unfortunately it will excarcerbate the mess and multiply the already huge cost to the tax payer while perpetuating the current economic uncertainty.
What needs to be done is that every bank needs to go over its balance sheet meticulously repricing their assets and liabilities in light of the changes in the Irish property market and in the global financial system. The shortfall in their balance sheets is exactly what the government is exposed to if they are to step in to prevent the failure of one bank from causing knock on effects in the economy (i.e. by winding up the bank and effectively making up the shortfall with tax payers money). With this information an informed strategy to deal with the problem could be formulated; i.e. a plan to fold one or more of the banks.
Unfortunately an approach like this would require: pragmatism, intelligence, balls and the power to stand up to a very powerful special interest group (the bankers). I don't see an abundance of these qualities in the leadership of this country. So the banking executives (talk about turkeys and christmas) managed to convince a weak and franky stupid government and public service into taking responsibility for all the pain for the f*ck-ups made by these very executives.
It is simply a fact that at least one (perhaps two) of the banks are insolvent and have more liabilities than assets on their balance sheets; the markets knew this and thus their share prices were heading rapidly to zero.
This is the fundamental issue here as far as I am concerned and instead of dealing with the reality (that these banks are simply bust) before any more contagion can happen, the government has been duped by banking executives into leaving them with complete control of a what is effectively a blank cheque. The insolvent will not only be allowed but will be aided in persuing savings from punters and other financial institutions (who will be delighted to effectively lend money to the Irish government at rates much higher than they could through the bond markets) in a desperate attempt to "trade" their way out of the mess they are in. I think we can safely assume that the executives which drove the banks into this sorry state during a boom period will fail miserably to trade their way out of it during a recession.
To use an analogy, what do you do with some-one who you suspect is deep in negative equity with their home and who is struggling to keep up with their mortgage payments who for some reason you cannot allow to go bankrupt? About the worst thing you could do would be to guarantee their liabilities unconditionaly allowing them to rack up extra loans and put new TVs and holidays on their credit-card (although this would undoubtably be popular with the person you are trying to help and they are likely to promise that they'll mend their ways and come up with someway to close the gap). Instead the first thing you do is get the house revalued at current market rates, you look at the size and cost of ALL of their debts and then calculate the shortfall between their wages and the cost to sevice their debts. If necessary, the house may have to be sold (though there is no reason to rush) and the money used to pay off as much of the mortgage as is possible and demand a chunk of their wages before taking on the remaining debt yourself.
So where exactly are the banks going to find the profits over the next two years to shore up their capital base? It's all very well taking in depositors money and flogging bonds to other institutions but these activities do absolutely nothing for a busted balance sheet. It's the height of financial naivity to think that profits of this magnitude can be magiced out of an Irish economy especially when the most optimistic don't see growth returning for another year or so.
You can be 100% sure that the inevitable will eventually occur and the government will be forced to step in to sort out the mess left by a collapse. Unfortunately this measure means that the problem is likely to be much much worse when it does happen as a result of this guarantee with billions extra worth of savings and bond holders to be compensated.
If this measure simply deferred the moment of reckoning, then I would perhaps consider this head-in-the-sand approach to be cowardly but perhaps not damaging. Unfortunately it will excarcerbate the mess and multiply the already huge cost to the tax payer while perpetuating the current economic uncertainty.
What needs to be done is that every bank needs to go over its balance sheet meticulously repricing their assets and liabilities in light of the changes in the Irish property market and in the global financial system. The shortfall in their balance sheets is exactly what the government is exposed to if they are to step in to prevent the failure of one bank from causing knock on effects in the economy (i.e. by winding up the bank and effectively making up the shortfall with tax payers money). With this information an informed strategy to deal with the problem could be formulated; i.e. a plan to fold one or more of the banks.
Unfortunately an approach like this would require: pragmatism, intelligence, balls and the power to stand up to a very powerful special interest group (the bankers). I don't see an abundance of these qualities in the leadership of this country. So the banking executives (talk about turkeys and christmas) managed to convince a weak and franky stupid government and public service into taking responsibility for all the pain for the f*ck-ups made by these very executives.
G
Guest124
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If we get another vote on Lisbon this guarantee could become an issue if the EU try and get the Government to change it. Lisbon is all forgotten for now with this current crisis and if anything I'm sure some people are saying so glad I voted No.
The Financial Times Lex column of yesterday makes sobering reading. I bought the paper - you can't access it online unless you are a subscriber.
It points out that 80% of Anglo Irish Banks loan book is made up of rapidly declining Irish and UK property loans. BofI's loan book is 71% property and AIB's is 60%.
It also points out that it is very easy to give these guarantees (the Irish Government's new law) but extremely painful to honour them.
Even with the government's guarantee, will the wholesale money markets once again start lending to the likes of Anglo? If they do, will it be at a premium which prudence would suggest shouldn't be taken up? Will this only result in a bigger mess?
Will those in charge in these six banks attempt to trade their way out of this mess when they know they should be putting their hands up (in some cases, not all) and saying that the game is up, we need to merge/shut up shop?
As to Lisbon, it hasn't a prayer of being passed now. This cock up is pure gold for the likes of Libertas. I, for one, would have liked more Brussels intervention. We're incapable of acting honestly ourselves.
This entire saga is pure "Galway Tent Politics": Clique-ish, secretive, unaccountable and probably bad for us.
D.
It points out that 80% of Anglo Irish Banks loan book is made up of rapidly declining Irish and UK property loans. BofI's loan book is 71% property and AIB's is 60%.
It also points out that it is very easy to give these guarantees (the Irish Government's new law) but extremely painful to honour them.
Even with the government's guarantee, will the wholesale money markets once again start lending to the likes of Anglo? If they do, will it be at a premium which prudence would suggest shouldn't be taken up? Will this only result in a bigger mess?
Will those in charge in these six banks attempt to trade their way out of this mess when they know they should be putting their hands up (in some cases, not all) and saying that the game is up, we need to merge/shut up shop?
As to Lisbon, it hasn't a prayer of being passed now. This cock up is pure gold for the likes of Libertas. I, for one, would have liked more Brussels intervention. We're incapable of acting honestly ourselves.
This entire saga is pure "Galway Tent Politics": Clique-ish, secretive, unaccountable and probably bad for us.
D.
Why would they be covered? Its the banks deposits, interbank funding and debt that is being guaranteed