Belfast Telegraph

Thursday 27 November 2014

People may pay for bank bill

There is a scene in the film Zulu, where the thin red line is awaiting a final, probably fatal, attack and the sergeant-major berates a soldier for having his top button undone. Good for morale, no doubt, but hardly relevant.

Which may well be the case with the more eye-catching details of the bank guarantee scheme unveiled yesterday.

The morale of the Irish public, battered by last week’s Dublin Budget as well as the general economic malaise, needs to see the bankers paying for their supposed sins.

After all, they, as taxpayers, are standing behind a €500bn guarantee to all the banks operating in Ireland. They have not got €500bn, nor could they get it if they tried.

It is assumed that no conceivable circumstances would require anything remotely like this sum to be paid. It would be foolish to assume, though, that no real money will ever have to be paid.

So people expect the banks to pay their share, and bankers to suffer. The fee for the guarantee is to be at least 10% of profits. This may amount to a billion euro.

The way bank profits are likely to go, it may be a declining figure. There is also the little difficulty that the purpose of the scheme is to restore the banking system to rude good health. Taking capital off them seems an odd way to go about it.

It is also probably a bit pointless now having Government representatives watching out for risky lending. If there is one lesson from booms and busts, it is that no-one touches the stuff that caused all the trouble. Heard of any dot.com bubbles recently?

There is much talk of more regulation, but less about better regulation.

The Government might start by abolishing the committee of top bankers which it established by law to sit on the Regulator's shoulder.

Watching the top bankers' earnings curbed, and their golden parachutes unharnessed, will be a harmless enough pleasure.

Assuming it happens, of course, which seems less than certain.

But the real interest for taxpayers, as it was for the besieged troops, should be whether the defences erected around the banking system will hold?

There are two risks. The first is that an Irish institution fails, and some of the guarantee has to be paid out. In this respect, the decision to guarantee the existing debt of banks, rather than just new debt they needed, looks unnecessarily dangerous.

It does not help that the Government has not answered Labour Party queries about the guaranteeing of high-yield loans made by rich individuals to the banks.

The second risk is that the scheme does not work and the Government will need to invest real money in the banks, in the way that the US and most of the EU is doing.

Getting the Irish banks to the financial position of the UK ones, after their government help, would require €10bn-€15bn. As the national debt rockets past 40% of GDP this year (from 27% last year), Mr Lenihan is in no mood to borrow sums on that scale.

He may get lucky. If the global crisis eases, perhaps the Irish banks will be able to re-finance themselves by tapping the markets in the normal way.

The guarantee scheme would turn out to have been a largely costless way of saving the system from collapse.

But it is worth remembering that free lunches are rare events.

Brendan Keenan writes in the Irish Independent

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