|The Blanket State Bank Guarantee
The issue of the blanket bank guarantee
where Ireland was alone among Eurozone countries to provide a sovereign
guarantee covering bank creditors such as bondholders, is discussed in
Michael Hennigan's article.
On September 17th, 2008, days after the
collapse of Lehman Brothers, Minister for Finance Brian Lenihan met celebrity
economist David McWilliams, who urged the minister to issue a blanket guarantee.
McWilliams wrote in the Irish Independent in 2009:
"He was worried that this guarantee idea was too
radical. And I could understand this because he was the man who had to make the
decision, not me.
I told him he simply had to guarantee
everything for a limited period to make sure that an illiquid dilemma didn’t
lead to an insolvency catastrophe ... I walked him out to his car and he
reiterated the fact that his officials would explode if they knew he was there.
I said I wouldn’t tell a soul if he didn’t.
The minister called me the next day and
again on Friday, the 19th, when he rang to say they were contemplating a partial
guarantee. My view was that such a move would accelerate capital flight, not
avert it. From then on, we spoke on a daily basis, but he still wasn’t convinced
and, from what I could gather, his officials in the department were dead set
against a full guarantee, although they didn’t seem to be coming up with an
Last year Brian Lenihan said that during a telephone conversation he had on
Sunday, Sept 28th, 2008 ‑ a day before the state bank guarantee was agreed ‑
Jean-Claude Trichet, ECB president, urged him to “save the banks at all costs”.
This has become a battering ram for opponents of the ECB and John Bruton, former taoiseach, has raised it in an Irish Times article. However, Brian Lenihan, a
lawyer, knew that a consequential decision should not depend on an informal
phone conversation, whether or not Trichet would confirm the claimed words.
There had been no contact with the heads of the key EU institutions as the
policymakers in Dublin anticipated an inconvenient response.
Europe’s competition commissioner has
said Ireland’s banking blanket bank guarantee was a mistake whose
sweeping scope served to concentrate losses on taxpayers.
told The Irish Times that the intervention in September
2008 resulted in citizens having to assume responsibility for losses
that would have been “better distributed” in the absence of an
The commissioner said the guarantee
curtailed the capacity of the authorities to impose losses on senior
bank bondholders and undermined the Irish sovereign.
Interviewed in advance of a visit to
Dublin today, the commissioner said “Yes, indeed” when asked
whether the guarantee as enacted was a mistake.
said the then government’s failure to notify the EU authorities in
advance of the intervention was “very unfortunate” and noted that
the initiative came as a big surprise among senior Eurozone figures.
“To my knowledge, everything was
explained and [discussed] ex poste. I remember some conversations with
the Irish authorities that they tried to explain to us why it was not
possible to establish the contact, but in any case I think everybody
learned from that experience, from that bad experience,”
“If I remember well, it was at the end
of the September 2008 when the Irish authorities – without notification
here [Brussels] – extended an unlimited guarantee to assets, also to
creditors; and all those bondholders that can benefit from this
unlimited guarantee, they are protected.
“This was not our decision; even this
was not a decision that had been notified here ex ante. We were dealing
the day after with – how do you say? – a fait accompli.”