Guaranteed Irish!

November 8, 2011

There are many myths surrounding the Irish Bank Guarantee.

Two ministers of the FF government of the time, Willie O Dea TD and Mary Hanafin speak of being bounced and rushed into the  decision.

One argument suggests the Irish banks, in particular, Anglo Irish,  controlled government in return for a pact of crony influence that gave FF control over the Irish banking sector. This led to an unhealthy and ultimately corrupt alliance between FF, cronies in the developer/construction industry and bankers. Light regulation led to an amber light turning green for a massive bubble economy unfettered by regulation.

It was a disastrous mistake to take the bill on the sovereign.

David McWilliams has argued it was a good thing to invoke the bank guarantee sovereign underwriting of Irish banking debt. For him there was the Swedish parallel in the early ’90’s whereby Sweden responded to its banking collapse by initiating a guarantee; then going in and cleaning up the banking sector with closures including default and the sale of mortgage property in massive firesale sell offs.

David sees the failure of the Guarantee due to the absence of the second stage of Sweden’s accomplishment, the cleanup. We had no default verboten by the ECB.

Temp things have a tendency to be difficult to unwind.

Unfortunately, our circumstances were different to those faced by Sweden. We were members of the EMU, stuck to an exchange rate with massive debt owed to bondholders located most probably in European Banks, France and Spain, and exposed to the US dollar fears of a global recession including a new financial world served by Credit Default Swaps held against the eurozone by banks eg Morgan Stanley and Goldman Sachs. We were in a different cocoon compared to that of Sweden in early 1990’s.

What should we have done?

We should have consulted with our neighbours, Alistair Darling, the British chancellor, should have been consulted:

The French Finance Minister, Christine Lagarde, should have been consulted:

The ECB under Trichet should have been consulted.

Conference calls should have laid it on the line that Ireland was under threat and a policy response to safeguard the Irish state interests with protection of the interests of the EMU, was at stake.

Alexander The Great

Alexander the Great would never have made that mistake at the Battle of Isis. Alex would have deployed all his forces against the banks but have retained his elite guard, the Companion cavalry, and held them in abeyance until the battle was waged and the right opportunity to commit arose.

Alex would have used the European wide experience in dealing with the banks, especially Lenihan’s French counterpart, Christine Lagard, also Alistair Darling, Lenihan’s UK counterpart, also the ECB under Trichet, to initially defend this country against its attack by the banks.

We should have watched the battle ensue and allowed these counter parties to extract maximum defence of this country against the banks. Danger of european contagion could have been used by us to maximum effect in persuading the ECB to defend this country against contagion from our own banking sector.

It was disastrous to commit this country’s resources alone against the Irish banking sector fueled by the ECB; even taking into account DmcW’s belief that this was to give short term shelter from the storm, that later measures could be taken to unwind the guarantee.

Logic and reason should have shown that he who pays the piper would not call the tune in this instance, that the ECB would not step in and carry the burden of the banks for us, that we would carry that anchor all by ourselves to Davy Jones’s locker.

Alex would have assembled the forces of the ECB, the British Exchequer, the French under Ms Lagarde, to come up with a package favorable to Ireland.

When this package/response became clear, that was the time to release the Companion cavalry of the Irish parliament, to rip that package apart and demand a better deal for Ireland that we could sign up to, or OUT.

Lots of mistakes were made in strange and surprising circumstances by many involved in the bank guarantee.

Its easy to have 20:20 vision in hindsight.

Nevertheless, in examining the past, its useful to recognise mistakes and point out other courses of action, that could have avoided worst outcome for Ireland; namely, how bankers acting in unison with the ECB, Irish politicians, Department of Finance,  fleeced  Ireland.



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