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Ireland Calling with John Spain
The Mega Bailout for Irish Banks
October 10, 2008
Ireland Calling by John Spain
ALTHOUGH this column had been warning in recent months that the situation of the Irish banks was not as secure as they were claiming, the speed with which they got into catastrophic difficulty last week shocked everyone here, including myself. And just as shocking as the speed of the collapse was the size of the government intervention to save them — a staggering €400 billion.
Now it’s easy to say the words four hundred billion. With the global financial crisis we’re all used to talking billions these days. But let’s take a moment here and try to get our heads around just how big €400 billion is in relation to a country the size of Ireland.
For a start, €400 billion is equivalent to around $570 billion U.S. dollars. And to think the politicians in Congress were having nervous breakdowns at the $700 billion bailout brought forward by President Bush!
Our little country with five million people is equivalent to just one of the 50 states in the U.S., which has a total population of 300 million. Yet we need $570 billion to save the Irish banks, and you only need $700 billion to save the American banks!
Now is it just me, or is there something strange about this?
Yet here in Ireland over the past few days it’s become completely accepted that the Irish banks do need a $570 billion bailout to survive. To understand just how much this is relative to our size, let’s work out the proportional figure if the same deal was to go down in the U.S.
We’re only one state and the U.S. has 50 states. So let’s multiply the Irish bailout figure by 50 to see what American banks would get at this rate.
Okay, so you’re too lazy to do the math. Well, 50 times $570 billion is $28,500 billion. And the politicians in Congress were whining about a lousy $700 billion!
You get my point. So let’s get serious here for a minute. The sheer size of this mega bailout by the Irish government of the Irish banks is colossal.
What the Irish government did was to announce that it was giving a state guarantee to ALL deposits, loans and liabilities of the Irish banks for a period of two years, and that this added up to a guarantee of €400 billion.
It was a guarantee, not a bailout, the government insisted. It would mean that the Irish banks could now go out and borrow on the money markets again and get credit here moving again because the Irish state guarantees they will be able to pay back the money.
Similarly, even if lots of loans the Irish banks have made here go bad, our money will be safe in these banks because the Irish state guarantees it. Even if banks are forced to merge or go out of business, our money in these banks will not be lost.
The Irish government is saying that this guarantee is not the same as the American bailout. It is a state guarantee of 100% of the money in our banks, and of the money that our banks borrow to lend to their customers.
It is not the same as the American bailout which will be used to buy out the toxic loans of most banks in trouble over there and thereby give them a fresh start.
Well, yes and no. The bottom line on the Irish guarantee is that if the toxic loans here add up to billions and the banks cannot trade their way out of the mess pretty quickly, then it is the Irish taxpayer at the end of the day who will be getting the tab. And it won’t be just me who will be paying. It will be my children and grandchildren.
In the final analysis, it does not matter whether it’s a bailout or a guarantee. The taxpayer will be carrying the can. As always, there’s no such thing as a free lunch (unless you’re a banker, of course).
And if you think the American taxpayer is in deep, have pity on the Irish taxpayer who could end up at the bottom of the ocean.
So what happened? How did it all go so bad so fast?
It actually happened on Monday of last week, as I was writing last week’s column for this page. On that one day shares in the main Irish banks had their worst day for decades.
Shares in Anglo Irish Bank, already down to one-third of the price they were a year ago, fell a further 46% in that single day, on Monday. Shares in Allied Irish Bank, Ireland’s biggest bank, also about one-third what they were worth a year ago, fell by almost 17% on Monday of last week. The other banks were also down by huge amounts on that day.
Such a catastrophic fall in the bank share prices in a single day made it clear that the Irish banks were in deep trouble. There was a real danger that when the markets opened the next morning, Tuesday, at least one bank (and possibly more) would collapse. And that could have started a chain reaction here which could have put the whole financial system here in jeopardy.
So who panicked first? Why it was the bankers, of course, and that evening they were on the phone pleading for an audience with Taoiseach (Prime Minister) Brian Cowen. What a sight that must have been, the leaders of the biggest banks in Ireland lined up in the taoiseach’s office like naughty schoolboys late at night.
They pleaded for help and suggested that a state guarantee was the best way forward. The midnight oil burned long into the night and early morning.
Eventually the government — mainly Cowen and the Minister for Finance Brian Lenihan — agreed to give these financial geniuses what they needed to save the banks. And at 6 a.m. on Tuesday morning, the news of the extraordinary *400 billion state guarantee of the Irish banks was broken to a shocked media and an even more shocked nation.
There are some strings attached, which are being worked out as I write. The government is going to levy bank profits to help pay for the guarantee, and a figure of around €500 million a year has been mentioned. This sounds like a lot, but if you had to buy a €400 billion guarantee on the global insurance market it would cost a big multiple of €500 million.
Also the government has made it clear that the financial regulator will be looking at executive pay at the top level in the banks. And there has been a suggestion that the government might even put in a director of its own on the board of each of the banks.
All of which sounds good, but keeping tabs on what the banks do is not going to be easy. There is a real sense here that these bankers have got what they wanted (a state guarantee equivalent to a triple A rating) and with that in their back pocket now intend to share as little as possible — either money or information — with the state that has saved them. Leopards don’t change their spots, and these guys are real man eaters.
The Irish government has been emphasizing that a major factor in the crisis for the Irish banks was the global credit squeeze. And that is true.
Lending here no longer relies on the base of domestic savings and deposits. Much of the money loaned out these days is money the Irish banks have borrowed on the global markets. That has dried up, so the Irish banks had a big problem.
That is true. But it is only half the story.
The other half is the lousy lending that got our banks into trouble — mainly high risk lending to property developers borrowing hundreds of millions and, at the other end of the scale, home buyers getting huge mortgages that they could not really afford. The Irish banks have around half of their loan books riding on a property market that has gone into reverse.
That is why the hedge fund jackals have been targeting our banks, and why the international money markets do not want to loan money to us. The slide in Irish bank shares over the past year has been clear evidence of what the global money players think of us. So in that sense we were an accident waiting to happen.
The crash came on Monday of last week. The €400 billion guarantee immediately caused a jump in Irish bank shares on Tuesday, but since then they have slipped back again. Why?
Because the guarantee does not change the underlying problem of the main Irish banks, and that is their heavy exposure to the property slide here. Even with a guarantee, the international money markets seem reluctant to loan to us for that reason.
So the jury is still out on this one. Unless you’re an Irish banker, of course. In which case you’re too busy enjoying your free lunch. After which you will be laughing all the way back to the bank.
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