The Bankwatch

Tracking the consumer evolution of financial services

The Irish bank bailout is a clarion call to allow “Too Big” to fail

This resolution of the Irish situation is an unmitigated disaster.  Lets consider what has happened here.  Irish banks got greedy and took on enormous risk through external investments including US subprime mortgages.  The Irish government chose to guarantee 100% of bank liabilities.  That took the Irish debt /GDP from 60% to 176%

Ministers sign off on €85bn Ireland deal | ft.com

About €50bn is aimed at bolstering Ireland’s public finances while it implements a €15bn austerity package over the next four years. Of the remaining €35bn, €10bn will be used to recapitalise Ireland’s stricken banks, while another €25bn will be a contingency fund to help support the banking system if necessary.

… …

EU ministers also said that loan maturities in the Greek package, agreed earlier this year, would be extended in line with the Irish terms.

The numbers involved are mind numbing and what gets forgotten here is the role of government and the role of private institutions such as banks.  Government has only one revenue source and that is taxation.  By tripling their debt through the bank guarantee, the Irish Government have tripled the liability their taxpayers must fund.  It is not hard to understand why the Irish population as a little ticked off.

The proponents of the bailout will argue that the alternative is worse and a run on the Euro might ensue.  But do they honestly believe the problem has gone away?  Next Spain and Portugal and lets not forget Greece. 

The dirty little secret is that the majority of Euro Sovereign debt is held by banks.  So the bailout merely allows Ireland to continue to make interest payments to the banks. 

What if the banks had to write of Irish debt?  What the economic consequences be worse than the results of the bailout?

Relevance to Bankwatch:

Banks have made themselves into pawns.  What part of providing your debit card services, your online banking and your money safety has any of the above got to do with it. 

The case for delineation of investment banking and retail banking has never been stronger.  We are no closer to a resolution of the next banking crisis.

Written by Colin Henderson

November 28, 2010 at 20:52

Posted in Uncategorized

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