It is telling that no other country has followed the Irish example. Even if the much talked about consolidation comes to pass, the taxpayer is still on the hook for losses (until 2010 at least).
Simply not true. Here is a list of other State Guarantee Schemes:
France: Up to 320 billion euros to be made available to guarantee bank lending. The fund will guarantee bank paper issued before Dec 31, 2009, and lasting up to five years.
Germany: The government will provide 400 billion in guarantees which will run until December 31, 2009.
Italy: The Treasury will guarantee new bonds issued by banks until Dec 31, 2009, with a maturity of up to five years.
UK: Government to guarantee about 250 billion pounds in short- and medium-term borrowing by banks.
Austrailia: The government said it will guarantee all new and existing bank deposits for three years all wholesale funding to Australian banks for five years.
Austria: Government has issued a blanket guarantee on savers' bank deposits, and put aside 10 billion euros to guarantee the deposits of small- and medium-sized companies. Up to 75 billion euros will be provided in guarantees for interbank lending. The guarantees will be given to a newly formed clearing house company managed by the banks.
I could keep going on but sufficed to say Bulgaria, Cyprus, Czech Republic, Denmark, Greece, Hong Kong, Hungary have all announced guarantee schemes of one form or another covering either deposits, interbank lending, debt raising.
My point is that the government extended the guarantee to all the banks both the good and the bad so how does it now let any bank fail? On what grounds can the state allow one of the weaker banks to go under if it has guaranteed much of it's debt until 2010?
The guarantee was put in place to protect the system. Yes that includes weaker and stronger banks but the same thing occurred in every other country listed above. There was a huge danger of people losing faith in the banks as a mechanism for holding and transferring money and the Governments had to first protect the banking system and attempt to get the cogs of credit going again. They achieved that partly.
You need to remember that the state is only out of pocket should something go wrong, and the state is collecting a hefty insurance premium from each participant who signed up. The terms of the guarantee fund also demand that for all those who participate, they must introduce measures to protect the weaker parties and produce detailed business plans as to how they will improve their position. Now this does not guarantee anything but does, if adminstered correctly by the government, provide a solid platform to work our way out of this mess.
You are perfectly right that weaker bank's deposits, interbank lending, bonds are protected. Is this necessarily a bad thing??? Yes the state is at risk of being out of pocket (but only if something goes wrong), but it means that the weaker bank is a least more attractive to a potential buyer or merger approach. It helps protect the jobs, funds, engagements & commitments of these banks from grinding to a complete halt.
I agree with you in that the term of the guarantee is probably too short but the government has pledged the taxpayer to cover liabilities that are in excess of 2x GNP. How can we hope to cover even a fraction of this guarantee? If the Irish banks were to suffer similar % losses on their property lending that the Swedish banks did as a result of their property boom then the cumulative cost of the boom could easily run into tens of billions of euros.
By the way, I appreciate the stronger bank argument but the fact is that the strongest bank we have has about 55% of all loans devoted to property and constuction, is inadequately capitalised and is overly dependent on wholesale funding. The others are even worse!
A couple of things on the above..
The Government does not need to cover anything unless something goes wrong.
Should something go wrong I would argue the cost of funding the guarantee via exchequer borrowing far exceeds the risk to the economy, jobs, and stability if the government had left the banks to fend for themselves.
I agree the banks are undercapitalisd. But I get v apprehensive when I see people make quotes like 55% of exposure to the construction industry/commercial industry. Can you quote your source for this figure??
Also, do you appreciate that in the instance that your right and the figure of 55% exposure is correct or even higher - that the banks can recover a signigicant portion of these loans? Even if property prices have dropped, the recovery rates are usually adequate when you factor in items such as collateral on hand, the ability to sue counterparties who don't meet their contractual commitments etc etc. The banks would take a hit no doubt, but they would still come out the other end. It's the economy who would be the big loser.
I have spent some time looking at the tier 1 and tier 2 capital ratios of these banks. They are off no doubt, but I honestly believe the scaremongering, public witch hunt, and inaccurate reporting of the situation is actually leading us all into a self-fulfilling prophecy...