|European Central Bank President Jean-Claude Trichet (on right) welcomes Irish Finance Minister Brian Lenihan to the 10th anniversary celebration of the ECB, in Frankfurt on Monday, June 02, 2008. |
The Government's emergency legislation to provide a €400 billion guarantee for the Irish banking system will enable the State to take a stake in any financial institution and is expected to get the approval of the Oireachtas today.
The Bill provides the Minister for Finance with powers to protect financial institutions and allows for competition law to be set aside to facilitate bank mergers, if necessary to protect the stability of the financial system.
On Tuesday morning, following a collapse in Irish bank shares on the previous day, the Government said it would guarantee all deposits and debts totalling €400 billion at six Irish-owned financial institutions. The guarantee limit is almost 10 times the value of the national debt of about €43 billion.
The Government said that its goal is to guarantee the banking system for two years, to improve the banks' access to inter-bank market funds.
On Tuesday, the euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05%, the European Banking Federation said in Brussels.
The 3-month rate rose to a record 5.277% - more than 1% above the European Central Bank's benchmark rate of 4.25%. Before the onset of the credit crunch in August 2007, the 3-month Euribor rate would typically be 0.1% to 0.15%, above the official policy rate.
As the 3-month rate is used as a benchmark for more commercial loans, the current rate is equivalent to 4 additional typical ECB rate hikes.
Not only is the cost of money high, banks are wary about lending to other banks. For example, financial institutions placed €44.4 billion on deposit with the ECB overnight between Monday and Tuesday, at a lower rate than they could get elsewhere.
Introducing the Credit Institutions (Financial Support) Bill 2008, the Minister for Finance, Brian Lenihan, told the Dáil last night that it was not about protecting the interests of the banks but about safeguarding the economy and everyone who lived and worked in this country.
He said that the guarantee to the banks was not "free" and taxpayers would be remunerated for the value of the support provided.
"There is understandable concern that the Exchequer is potentially significantly exposed by this measure. I want to reassure the House and the Irish people that this is not the case. The risk of any potential financial exposure from this decision is significantly mitigated by a very substantial buffer made up of the equity and other risk capital," said Lenihan.
He added that total assets of the six Irish financial institutions concerned exceed their guaranteed liabilities by approximately €80 billion - half of Ireland's total GNP.
"By any measure there is, therefore, a very significant buffer before there is any question of the guarantee being called upon,"he said.
The Bill enables the Minister to set a higher charge for the State guarantee on financial institutions which have been engaged in higher risk lending. This is designed to counter the "moral hazard" argument of the Government being seen to support banks that take higher risks.
AIB, Bank of Ireland, Anglo Irish Bank, Irish Life Permanent, Irish Nationwide Building Society and EBS building society, as well as their subsidiaries, are all covered.
Foreign-owned banks operating in Ireland, including the Ulster Bank Group, which is owned by the Royal Bank of Scotland, Bank of Scotland (Ireland) and the Danish-owned National Irish Bank, have requested the Government to be covered by the guarantee, claiming the scheme will put them at a competitive disadvantage.
It is likely that the European Commission will rule in favour of the foreign-owned banks. In the US, $700 billion bailout plan for Wall Street, covers such businesses operating in the United States.
On Tuesday, Lenihan conceded that Ireland might be accused of reverting to economic nationalism and ignoring pan-European solutions to the market turmoil.
He said: “I accept it is a tendency towards economic nationalism but we’re on our own here in Ireland and the government had to act in the best interests of the Irish people”.
Two weeks ago, the Government raised the State guarantee limit on deposits to €100,000 from €20,000. On Tuesday, its decided to extend insurance to all deposits.
The emergency Dáil debate only began at 10 pm last night having being delayed on four occasions.
The Bill specifies that all financial support provided shall, so far as possible, ultimately be recouped from any bank that receives support. It also allows the Minister for Finance to regulate the competitive behaviour and commercial conduct of banks that receive such support.
Where financial support is provided to banks it will be reviewed by the Minister to establish when it is no longer necessary. He will also report to the Dáil on the level of any support provided and the payments made in return.
<Irish Government guaranteeing liabilities of about €400 billion of 6 financial institutions; CSO says Irish credit institutions and moneymarket funds owed €818 billion overseas in June; National debt was €43 billion>
|Decisive Action at the Edge of the Cliff
|The early morning decision on Tuesday to guarantee the liabilities of six Irish financial institutions and get rid of the two-week old new limit on insurance cover for bank deposits, following the bloodbath for banks on European markets on Monday, was a classic example of Irish decision making - -take decisive action only when there is a serious crisis.
This approach reflects the system where there is limited accountability and the buck stops nowhere.
"The policies which we pursued in the past, which saw growth rates in excess of the average, which saw the economy outperforming most other countries in the EU in other times, were the correct policies for those times," Taoiseach Brian Cowen said in Edinburgh on Friday Sept 26, 2008. It's surely a bizarre statement but who holds him to account?
Even before the Census 2006 disclosed that the number of empty properties in the State had risen 122,000 in the space of four years, Prof. John FitzGerald of the ESRI had issued a report highlighting this development.
Neither the Government or Central Bank were concerned.
Last year, the Central Bank told Finfacts that it did not collect any data on interest-only mortgages, which became standard for investment property purchases in return for a statement of net worth signed by an accountant.
Even the accountants themselves discovered that fees from auditing and producing business plans was a mug's game compared with selling property.
On Tuesday, after the horse had bolted the stable, the Central Bank issued the following statement: "The Central Bank, along with its colleagues in the Financial Regulator, has been very closely monitoring developments in the international financial markets and in particular the increasingly negative impact these have had on the availability of funding for Irish credit institutions. Following consultation with the Central Bank and Financial Regulator, the Government decided to put in place a guarantee arrangement today. This decision was taken with a view to protecting financial stability while also enabling credit institutions to access funds and to provide credit to companies and households.
This action by the Irish authorities confirms our commitment to the stability of the financial system. The Central Bank will continue to very closely monitor the situation in the period ahead."
Competition is good in both the financial sectors and elsewhere but it requires inspired regulation.
The Irish Central Bank governor, is the chief regulator and is traditionally a Department of Finance official who has had three decades of experiencing its culture but who was willing to stand up to politicians who thought that they had invented the free lunch?
And as thousands in the Irish private sector face a bleak future, the report that two sitting Fianna Fáil TDs will each get €53,000 after they lost their non-jobs as junior ministers in May, is very typical indeed.
Irish Public Spending: Pre- IT/Web official policy prevails - hide as much information as possible from taxpayers
- - Michael Hennigan