Minister of Finance Brian Lenihan has warned that the the failure of the nationalised former builders' bank Anglo Irish Bank would "bring down" the country, as the Financial Regulator and Department of Finance prepare to disclose the total cost of rescuing the lender that is being prepared to be wound down over several years.
The cost to taxpayers is expected to be about €30bn and today is the second anniversary of the State bank guarantee taking effect.
While some lauded the move by the Government 2 years ago as a masterstroke, its decision to provide a guarantee of existing bank debt was a disastrous one.
"Any Anglo failure would bring down the sovereign," Lenihan told the Financial Times in an interview. "It is systemically important not because of any intrinsic merit in the bank. But because of its size relative to the national balance sheet.
"No country could contemplate the failure of such an institution."
The FT says some business people believe the government has exacerbated the situation by forcing banks to recognise their property losses in full upfront. But Lenihan said: “It means the banks are cleaned up and ready to operate and there’s no continued uncertainty about them."
The guarantee of existing bank debt prevented the Government restructuring Anglo Irish in the final quarter of 2008 before it acquired the bank.
Contrast that with what was done with the floundering General Motors in the US.
The Obama auto industry taskforce pushed GM into bankruptcy in June 2009, wiping out common stockholders and squeezing the holders of $27bn in GM bond debt into accepting a 10% share of the new GM. Bondholders also got warrants to buy more stock in a New GM if its future value exceeds $15bn, and again if it exceeds $30bn.
That old bond debt, along with old lawsuits, contracts and other trash, was dumped into Old GM, or Motors Liquidation as it is called.
All this happened in “the land of the free.”
As for Ireland, it certainly wasn’t the home of the brave and there wasn’t a huge risk involved as would be the case in exiting the euro and launching a confetti currency at a time of peril.
Two years later, it's easy to say now that there should be a default when the opportunity was missed at a time of turmoil in international banking.
Now Ireland is paying the second highest interest rates after Greece to borrow and both countries are dependent on foreign lenders to fund over 80% of public debt - - the highest dependency level across Europe.
Prof. Morgan Kelly of University College Dublin and Brendan Keenan, Group Business Editor of Independent Newspapers on Sept 30, 2008, the day the guarantee took effect. Kelly in a stunning tour de force, accurately presents the enfeebled state of Irish banking:
"Irish banks are resilient and have good shock absorption capacity to cope with the current situation" - -Patrick Neary, Chief Executive, Irish Financial Regulator, September 19, 2008: - two days after the collapse of US investment bank Lehman Brothers.
Two weeks later, the Irish Government guaranteed all the deposits and liabilities of six Irish financial institutions. On October 02, 2008, Neary appeared on RTÉ's Prime Time television programme, and in possibly the most bizarre performance by a public official on Irish television, since its launch in 1961, said that bad lending by Irish banks had nothing to do with the current international crisis which was all about liquidity. He said the banks had plenty of capital to absorb any losses on property loans and he did not believe that over-exposure to the property market was a weakness of the Irish banking sector.
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