Large-scale debt-holders starting up firms abroad

LABOUR Finance spokeswoman Joan Burton has expressed “outrage” that businessmen and bankers with large-scale debts in Ireland have been allowed to set up business and residence abroad.

Speaking at a heated Oireachtas committee meeting the Labour TD said this was an issue which was being increasingly raised by constituents.

“We know that most of the money has been wasted on speculation but these individuals would seem to still have access to considerable wealth, to ‘start up again abroad,’ a course not open to ordinary families weighed down with mortgages an other debts,” Ms Burton said.

The Labour TD said she believed such people have moral and legal obligation to pay back as much of their debt as possible.

“I have raised this issue with Brian Lenihan. People’s forbearance with this will only last so long,” she said.

Responding to Ms Burton’s comments Mr Lenihan pointed out that no “exit controls” existed in Ireland.

“If people want to move to another country they can... I am not accountable for their movements.”

The minister was adamant, however, that “every step possible under our law” was being taken to recover monies owed to Irish banks.

“If the deputy has any information that should be put at the disposal of the banks, of NAMA, and if there’s a question of a criminal matter, of the Criminal Assets Bureau,” Mr Lenihan said.

“The horse may have bolted when the barn door was left open,” said Ms Burton.

Fool’s guide to the bank guarantee

By John Hearne

SO the bank guarantee expires next week. Does that mean I’ve to get all my savings back under the mattress again?

No, not at all. See, there are three separate guarantee schemes on the go here. What you’re talking about is the Deposit Guarantee Scheme or DGS. For most ordinary bank customers, the September 29 expiry won’t make any difference. Deposits of up to €100,000 per person per institution are covered under the DGS, which was put in place two years ago. That scheme doesn’t have an end date. Now, the second guarantee, sometimes called the original or blanket guarantee, is officially the Credit Institutions Financial Support Scheme. This is the one the banks came looking for in the dead of night two years ago. If you’ve more than €100,000 at any one institution, any excess is covered by the blanket guarantee, but only if that deposit was made before the institution in question joined the third guarantee scheme, which was introduced last December.

The third guarantee scheme?

Yes, this is the Credit Institutions Eligible Liabilities Guarantee, or ELG Scheme. This covers all retail deposits, demand deposits and current accounts in excess of the €100,000, as well as term deposits of up to five year duration, as long as the deposit is made before December 31, 2010, and the institution is a member of the scheme on the date the deposit is made. Are you with me?

No.

Okay, in effect, it works like this. If you’ve under €100,000 in any one of the institutions covered under the blanket scheme – and that’s all the Irish banks, credit unions and buildings societies – your money is guaranteed by the Government. If you’ve €120,000 on deposit with the one institution, then €20,000 may no longer be covered when the CIFS scheme expires next week. To find out, you’ve got to know when the money went on deposit and when the institution signed up for the ELG scheme. The best thing to do is get in touch with your bank and ask them what the story is. In any case, if you do have more than €100,000, you could either just divide it up between institutions, or put it on term deposit of no longer than five years duration with one of the institutions which have signed up for the ELG scheme. Most of the banks have.

So what’s happening next week has very little to do with the man in the street then?

Sure it does. The guarantees are all about trying to make the banking system work properly again.

I thought NAMA was doing that.

NAMA’s another part of trying to sort the mess out. NAMA is taking over the banks’ property loans. Because the property market has collapsed, NAMA is only paying them a fraction of what the original loans were worth, which means that they are being forced to realise huge losses, which means their balance sheets are a mess. No one will lend anything to them, and in turn they’re not lending to anyone. Part of the process of getting them going again – so the story goes – is to guarantee the rest of the world that if the banks can’t pay them back, we will.

How much are we talking here?

Well, at the end of June, between deposits and bank borrowings, we were covering €334 billion.

We don’t have anything like that kind of money, do we?

No. No we don’t. Last year, our national income was around €131bn, so the guarantee underwrites about two-and-a-half times what we earn. It’s a bit of a bluff really. If anyone tries to call it in, we’re in big trouble.

So what exactly was covered under that guarantee?

Since the ELG scheme has come in, the list has changed, but the first one covers a multitude: retail deposits, interbank deposits, senior unsecured debt, asset covered securities and dated subordinated debt. It’s this last one that has caused everyone a lot of grief.

Why?

Subordinated debt is basically bonds that the banks issue. Like it says on the tin, it’s subordinate to other debts the banks have incurred, and, if the bank goes to the wall, it will be paid only after all other debts have been taken care of.

So if it was only supposed to last for two years, why is it still in place?

Well, just row back a sec. The ELG scheme was the first time they fiddled with the guarantee since it was brought in. This scheme, set up in December, was put in place to cover a gap in the original guarantee. It no longer covers the subordinated debt but it now covers fixed term deposits that mature beyond the expiry date of the guarantee. The Minister for Finance is still saying that it’s just a temporary thing and that it will be wound down – all except the deposit guarantee scheme that is – but basically they’ve decided that to allow it to end on September 29 would be too dangerous. This is because many of the banks don’t have their funding for the year sorted out yet, and basically they’re still too dysfunctional and sickly to manage their funding without the backing of a state guarantee.

What’s the full cost going to be of all this?

Who knows? But the worrying thing is the international markets are now demanding a huge premium to lend to Ireland. Whatever it ends up costing, the interest rate bill alone is going to be scary.


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