# "The bank guarantee is not the cause of our ills"



## Brendan Burgess (31 Oct 2014)

An excellent article by Dan O'Brien in today's Indo 



> The conventional wisdom now is that all our woes stem from that single decision made at a single moment.
> 
> 
> The conventional wisdom is wrong.



and



> While there are many factors and issues around the handling of their  respective financial crises, the notion that Iceland's economy has  performed better than Ireland's since 2008 is not supported by the  facts. Claims frequently heard here in Ireland that our north Atlantic  neighbour made some sort of miraculous and rapid recovery because it did  not guarantee its banks, are simply false.



and 



> In the discussion of the Irish crisis, it is rarely mentioned that  the most rotten of the banks - Anglo Irish - had €19bn in deposits from  individuals in September 2008, and €32bn from organisations, including  companies, charities, public sector bodies, pension funds and credit  unions.
> 
> 
> Had it been allowed to collapse, the direct cost to the  State would have been reduced to the tune of around €30bn. But the  additional direct shock to an economy already reeling from the collapse  of the construction industry would have been huge.


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## Duke of Marmalade (1 Nov 2014)

David McWilliams hailed it at the time as a Masterstroke. Unusually, he has been proven right on this occasion though strangely he has tried to backtrack in the face of the populist narrative. Can anybody argue that we would be in a better place today if we had let the banking system collapse?

The problem with the BG was that it was promoted on what have turned out to be false premises - that the banks were only facing a liquidity crisis. In fact they were massively insolvent. Hence even FF daren't claim any credit for the BG which leaves the looney tunes with free narrative space.

But here is the very interesting "what if?". What if Anglo and the others had come clean on the insolvency of the banks? Indeed did they come clean that night? It would have been almost impossible politically to bail out a massive solvency hole - the mantra had to be "the cheapest bank rescue ever". But I contend that *even if we knew it was a solvency issue* the correct thing was still to avoid a massive banking collapse. So we have the supreme irony that if the Anglo chiefs and others knew it was a solvency issue but stuck to the liquidity line to provide a fig leaf for the dig-out, then they actually did us a massive favour. (No cigar of course as they caused the problem in the first place.)

I sense a lot of disappointed people out there. People like Gene Kerrigan of the _Sindo_. Here was a massive failure for capitalism throughout the Free World and they wanted to dance on its grave. But officialdom (men in grey suits?) changed the rules and bailed out capitalism for the good of most of us but to the furiously indignant frustration of the academic looneys.


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## epicaricacy (1 Nov 2014)

Fintan O'Toole wrote an article a few months ago in the IT in which he compared the contemporaneous interest rates that the markets charged Greece and Ireland. It seems that there was very little between them - even though Greece defaulted on 50% (approx) of its debts and Ireland (unwisely) paid everything. In other words, the markets consider the risk of loaning to Greece and Ireland to be the more or less the same. Therefore, in retrospect, it seems obvious that the markets are more forgiving and pragmatic than we were lead to believe at the time. In other words, Ireland made a catastrophic error - particularly in relation to Anglo. No amount of selective revisionism can alter the awful mistake that the two Brians made at the time. After all, it has to be remembered that their decision was predicated on the untruth that the Irish banks were more liquid than they actually were. 
Of course, Ireland has structural deficits unrelated to the banking guarantee - due primarily to bloated public sector wages and pensions - but, it is extraordinary to claim that the bank guarantee hasn't had a devastating effect on the economy. A basic knowledge of the principles of economics would suggest that extracting massive amounts of money out of an economy - on an annual basis to service debts in the middle of a serious recession - can do nothing but serious long term harm. Ireland's recent economic policy - largely dictated by the bank guarantee - has been analogous to administering a barbituate to someone in cardiac arrest.


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## Duke of Marmalade (1 Nov 2014)

epicaricacy said:


> Fintan O'Toole wrote an article a few months ago in the IT in which he compared the interest rates that the markets charged Greece and Ireland.


As of yesterday Irish 10 year bond yields were 1.7%, Greece's were 6% or nearly fourfold as great. Greece will finish up paying actually more than it saved by defaulting as a result of its poor credit rating.

I'm afraid FOT is the epitome of the syndrome I have already identified. A lefty pseudo intellectual who lives in hope for the collapse of capitalism and who feels he was desperately cheated by the adroit handling of the crisis by the powers that be.


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## Conan (1 Nov 2014)

If I remember correctly, following the guarantee we had the likes of Brian Lucey, Constantin Gurgdiev and a variety of other "celebrity economists" on the Vincent Browne show night after night saying that we should default and that Ireland would have to seek a second bailout. I don't hear much from them these days.
Today we have marches opposing paying for water (misguided in my opinion) but how would those people feel if the Banks had collapsed at the time go the guarantee (as it seems the ECB threatened to withdraw support) and ATMs stopped working, because it was a solvency problem.
Nobody is saying that the last 7 years have not been difficult. But we did not do an Iceland. Our borrowing rate (important since we are still borrowing to make ends meet) is now down near German levels in stark comparison to the predictions of the looney left or the celebrity economists. Unfortunately those "populist politicians" persist with trying to delude people into believing that someone else should pay for everything. Even if they confiscated every cent off Denis O'Brien it would not cover our borrowing requirements for more than about 3 months. But as is the norm for these delusionalists, don't let the truth get in the way of their philosophy.


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## Brendan Burgess (1 Nov 2014)

Most of our debt is due to the massive excess of expenditure over tax income and not due to the bailing out of the depositors in the banks. 

I argued at the time that the banks were solvent but illiquid. But if any bank was not solvent it should be allowed to collapse. At the time, the deposit guarantee scheme had a limit of €20,000 which I considered to be the right figure. 

I was wrong in arguing that they were solvent. Although the PwC report some months later came to the same conclusion, with the benefit on an in depth look into their accounts. 

It was a huge mistake to guarantee the depositors in the banks which were not systemic i.e. Anglo and Irish Nationwide.  The depositors in those banks should have paid for the collapse in those banks. 

The cost of bailing out the depositors in  ptsb and EBS was always going to be small, so it was probably right to bail them out. Although, as they were not systemic, they could have been allowed to go.

AIB and Bank of Ireland had to be kept going.  They were systemic banks. 

So the solution was to guarantee the depositors and bondholders in AIB, BoI, EBS and ptsb.  And let the depositors in Anglo and Irish Nationwide, who were getting a higher deposit anyway, to take a hit. 

The government has made a profit on Bank of Ireland.
AIB says that the government is going to get back the money it put into AIB and EBS . It doesn't look like it to me, but they might. They won't lose a lot.
I think that "only" €2.4 billion was put into ptsb. They might get most of that back as well.

Of course, had Anglo and Irish Nationwide been allowed to fail, the main banks would have lost a lot of money because they had deposits there.  And a few credit unions would have gone bust, so we might have had to bail them out as well. 



> David McWilliams hailed it at the time as a Masterstroke. Unusually, he has been proven right on this occasion


David McWilliams was not right.  He said this was a masterstroke which would cost the taxpayer nothing.  The guarantee of the depositors in Anglo and Irish Nationwide has cost us around €30 billion.  

If they had not been guaranteed, Ireland Inc would have still lost the €30 billion, but it would have been the wealthy depositors who footed the bill and not taxpayers as a whole.


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## epicaricacy (1 Nov 2014)

DUKE - Many people are currently questioning the accuracy of the individual European countries' 10 year bond yields - as it seems that the rates are more reflective of the ECB's willingness to act (slashing interest rates and the promise of QE if required) as opposed to the real risk and economic performance of individual countries. The ECB's willingness to 'do whatever it takes' (as opposed to the financial and economic health of individual countries) probably explains why Portugal's 10 year bond yield is 3.20%, Spain's is 2.07% and Italy's is 2.34%. Whereas, Australia's 10 year bond yield is 3.28%. In other words, 10 year bond yields are currently not a good barometer re. a country's economic prospects.
Besides, if Greece sneezes Ireland (along with the other PIIGs) will catch a cold. Ireland is far from immune from another shock and our current 10 year bond yield could rocket at any moment. To suggest that Ireland's economic policies have been 'adroit' seems strange. We decided to guarantee the banks without being fully aware of their liquidity and (in)solvency.
We tried to play poker with the ECB and blinked. 
We paid massive amounts of money to people we should never have paid due to the blanket bank guarantee and this has contributed to the contraction in our economy.
We decided that denial of favourable tax breaks for companies such as Apple was the right thing to do.(Looks like another major error)  
We've continued to protect the existing members of the public service while screwing the new entrants - who are far more mobile and have left Ireland in their droves (leading to a brain drain which compounds our future pension problems).
Children have suffered disproportionally - which besides being immoral is also disastrous from an economics perspective.  
We've set up an insolvency service that's not fit for purpose and we've failed to deal with the arrears crisis in any meaningful way.
DUKE - what examples of 'adroit' economic policies are you writing about?


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## newtothis (1 Nov 2014)

Brendan Burgess said:


> It was a huge mistake to guarantee the depositors in the banks which were not systemic i.e. Anglo and Irish Nationwide. The depositors in those banks should have paid for the collapse in those banks.


 
I can't say I agree with this - how is a depositor to know if a bank is "systemic"? 

I think depositors should be protected in all banks (i.e. a licensed institution that meets whatever obligations the Central Bank deems necessary), up to a certain limit. 100,000 seems reasonable for the limit.

Who should definitely not have been protected, however, are investors/bond holders. If people want total security they should invest in government-backed investments; if they want some they should put money on deposit. Why should someone who wants a higher rate of return on their investment by buying bonds or shares in a bank be offered the same level of protection? At yours and my expense? 

If a bank is insolvent, it should be allowed to fail, with depositors protected to a limit. If the bank is "systemic", it should fail by being nationalised., if it isn't if should fail like any other business There is no logic and most particularly no fairness in protecting investors and bondholders, which is what I and most people find so objectionable.


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## Brendan Burgess (1 Nov 2014)

Hi newonthis

Anglo and Irish Nationwide were paying much higher deposit rates than the other banks, because they were seen by depositors as a bit riskier.

Many people put their money in the post office on fairly low rates because they did not trust any of the banks. 

I agree that the bondholders should not have been bailed out. 
You say that depositors above €100k should not have been bailed out. I say that the original limit of €20k was fine.  So we are agreed in principle, it's just the amount we disagree on. 

Brendan


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## moneybox (2 Nov 2014)

Brendan Burgess said:


> Hi newonthis
> 
> Anglo and Irish Nationwide were paying much higher deposit rates than the other banks, *because they were seen by depositors as a bit riskier.*
> 
> ...


 

I had a small deposit with anglo at the time, I am afraid I had no idea until now it was a bit riskier than other banks when I placed my deposit with them..


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## Brendan Burgess (2 Nov 2014)

moneybox said:


> I had a small deposit with anglo at the time, I am afraid I had no idea until now it was a bit riskier than other banks when I placed my deposit with them..



Why did you pick Anglo for your deposit?  Why not the Bank of Ireland or the Post Office? 

You say you had a small deposit.  People who had up to €20,000 had a deposit guarantee of 90% of their money. That protected the small depositors. 

Someone who was depositing €50,000 should have checked out where they were putting their money.


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## Duke of Marmalade (2 Nov 2014)

Brendan Burgess said:


> Someone who was depositing €50,000 should have checked out where they were putting their money.


Absolutely, they should have read the bank's accounts, especially the views of the external auditors. They should also have asked the Regulator's office for its view on the soundness of the bank.


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## monagt (2 Nov 2014)

> Today we have marches opposing paying for water (misguided in my opinion)



We do pay for water and always have...its the method that is opposed.......it will take in 150m, costs 750m to put in place that could have been invested by the Local Authorities (if it had been given to them) and not be socially divisive 
I know its off track so apologies.


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## Brendan Burgess (2 Nov 2014)

Guys - please keep the discussion on track. If someone takes it off track, ignore them.

Brendan


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## monagt (2 Nov 2014)

> Guys - please keep the discussion on track. If someone takes it off track, ignore them.


 Agree. 

I am wondering where this discussion is actually going. Should the state have intervened in the process?

If you were a citizen, just getting along as a taxpayer (making ends meet) with virtually no deposits or savings, small mortgage, family car how has the BG impacted you?

I know receipts and expenditure were out of sync and have to be balanced but without the BG costs, would life be a lot easier financially for the ordinary taxpayers with rebalancing not as severe.

The large savers would have been decimated but they had a choice earlier on, spend or save. (being Devil's advocate here).

I think this was a EC problem and not a country specific issue due to ECB /Euro,


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## Brendan Burgess (2 Nov 2014)

monagt said:


> The large savers would have been decimated but they had a choice earlier on, spend or save. (being Devil's advocate here).
> ,



They were not obliged to leave their money in Anglo or Irish Nationwide.

They could have saved in the Post Office for a lower return.

They could have bought an investment fund or property or shares directly. People who bought property saw huge drops in value and they were not bailed out by the taxpayer. 

Duke says


> Absolutely, they should have read the bank's accounts, especially the  views of the external auditors. They should also have asked the  Regulator's office for its view on the soundness of the bank.


No. They should simply have asked if their money was guaranteed. They would have been told that up to 90% of the first €20,000 was guaranteed, but that there was no guarantee after that. 

They should not have been given a retrospective guarantee at your expense and at my expense. 

Brendan


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## newtothis (2 Nov 2014)

Brendan Burgess said:


> I agree that the bondholders should not have been bailed out.
> You say that depositors above €100k should not have been bailed out. I say that the original limit of €20k was fine. So we are agreed in principle, it's just the amount we disagree on.
> 
> Brendan


 
I think in general we agree, but not on the specific point you were making that depositors in some banks should be protected (to some limit), but not others. My question to that is how is a depositor supposed to know? Unless there's some tiered level of licensing, how is a customer supposed to determine if a bank is "systemic"? Saying they should check out their accounts doesn't help: that is only an amateur's opinion. Mind you, when you look at he job the so-called professionals have made of banking....

Anyway, my point - and where I think we still disagree - is that any bank with a license should have some level of protection for depositors to some reasonably large limit, as otherwise it is difficult to maintain trust in the overall system.


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## monagt (2 Nov 2014)

> People who bought property saw huge drops in value and they were not bailed out by the taxpayer.



A very good point.


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## moneybox (2 Nov 2014)

Brendan Burgess said:


> Why did you pick Anglo for your deposit?  Why not the Bank of Ireland or the Post Office?



I picked Anglo simple because it was listed as one of the best buys on your website. i think the interest rate was 5%. I dont ever recall any warning sign warning posters to beware of the solvency of this bank. The amount involved was relatively small 25k.  Of course nowadays i am much wiser but back then I have to admit I had no idea what was going on.


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