Govt Guarantees Billions for Banks
In a dramatic move unprecedented in the history of the state, the government at 7 a.m. Irish time on Tuesday announced it was placing an unlimited two-year guarantee on all deposits and certain debt in six Irish banks.
The move, Finance Minister Brian Lenihan said after a night of planning in which he had only two hours of sleep, was designed to "safeguard the Irish financial system."
The impact was dramatic and immediate. In less than an hour one major Irish financial institution that had dropped in value by 46 percent the previous day not only recovered but improved its position by more than another 40 percent, although that dropped back to a more realistic rally of about 25 percent as the markets settled.
The government guaranteed $570 billion of bank liabilities, four times the size of the national economy, for AIB, Bank of Ireland, Anglo-Irish Bank, Nationwide, EBS and Irish Life and Permanent TSB. The guarantee covers all their deposits and debts, excluding equity and equity-like instruments.
Also excluded from the state's financial safety net are banks with non-Irish "parents" like Ulster Bank, National Irish Bank and Rabobank.
Lenihan made it clear he was very determined to send out a signal that the government was taking effective measures to ensure Ireland doesn't have any sort of catastrophic banking collapse like that which hit Lehman Brothers and several other financial institutions in the U.S.
Lenihan told a hastily-convened breakfast-time conference on Tuesday, "The government has decided to guarantee the lending of all Irish banks. That means they will find it easier to access funds from world markets, and it is extremely important for our economy that they will do so.
"Since the collapse of several institutions in the U.S. it has been very difficult for Irish banks to access funds on international markets. This will present real problems for the Irish economy if it is not addressed."
He insisted the government intervention did not mean the taxpayer bailing out the Irish banks.
The facility provided by the government would be subject to charge or levy which banks must pay. The level of the charge would be decided by the Central Bank which would advise the government.
Lenihan also said the banks were not being bailed out of the consequences of past mistakes.
"We're talking about their basic capacity to access funds in a world market that is now drying up of funds which are available for the use of our banks. If funds are not secured by Irish banks it will be a very, very serious matter for economic life in this country," he said.
"Every business, every worker, everyone knows how short those funds have been in the last year. If they dry up entirely that is very, very serious for Ireland. We must take action to secure the stability of our banking system, and that's what the government has decided to do.
"We are a small, exposed economy, one that is more globally exposed than any economy in any other member state in the EU. For us not to have a viable banking system would paralyze the trade of this country and reduce us to a powerless position in all the markets in which we buy and sell our goods and services."
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