Bank guarantee blamed on poor advice

The state guarantee of the banking system introduced five years ago that eventually undermined the country’s economic sovereignty was based on a lack of proper information, according to experts.

On Sept 29, 2008, the then finance minister, Brian Lenihan, signed into legislation one of the most contentious acts in the history of the State. The decision had been made in the early hours of that morning to guarantee the €440bn of assets and liabilities of the domestic banks.

It lumbered the State with a contingent liability that caused investors to lose confidence in the Government and forced it to accept a bailout in Nov 2010.

Financial analyst, Cormac Lucey, says it is important to distinguish what is known now and what was known at the time. He argues that the Government’s main advisers all said that it was a liquidity problem and not a solvency problem.

“Merrill Lynch was advising the Government at the time and it said it was a liquidity issue. In Feb 2009 PwC said Anglo [Irish Bank] had enough capital to cover its losses.”

The backstop of the banking system was put in place because Anglo Irish Bank was on the verge of collapse as it was haemorrhaging deposits and it could not access short-term funding. The Government took the view if Anglo collapsed then the other banks would also fall. The guarantee was supposed to shore up confidence in the system.

If Mr Lenihan had not introduced the guarantee and the banking system had collapsed, then he would have been blamed for allowing viable banks to go under, adds Mr Lucey.

Moreover, the ECB would have forced the Government to introduce the guarantee, he says.

UL economics lecturer, Stephen Kinsella, blames the poor quality of information at Mr Lenihan’s disposal on the regulators, bank auditors, and consultants.

“I do not believe that Brian Lenihan was rolling the dice with Ireland’s fiscal position. Bank guarantees have been used a number of times in the past and have not cost a cent.”

He argues that the Government should have bought time by making a number of phonecalls to Brussels and the ECB. If EU institutions had been involved in introducing the guarantee, it would have provided the Government with a bargaining chip in subsequent negotiations on reducing the debt burden as a consequence of taking these liabilities onto the State’s balance sheet.

The alternative would have been to allow the banks to collapse similar to what happened in Iceland. Mr Lucey argues that this would only have been possible if there had been a simultaneous exit from the euro.