Everything you need to know about the bank guarantee but were afraid

first_imgWHEN NEWS CAME through on the morning of 30 September 2008 that the Irish government had guaranteed the country’s banks, many did not know what to make of it.Why was it needed? Was it a good thing? Would it cost the taxpayer?Many of the questions could not be answered immediately but five years and €64.1 billion later, the Irish public are much more knowledgeable about the now infamous move.The two words are bandied about now to explain away our current economic quagmire but what did it do and what does it mean for us now?TheJournal.ie explains…What banks were covered by the bank guarantee?Six Irish institutions were covered by the guarantee – AIB, Bank of Ireland, EBS Building Society, Irish Life & Permanent, Anglo Irish Bank and Irish Nationwide.What money and investments were included?When commentators call it a ‘blanket guarantee’, they are not exaggerating. The government guaranteed pretty much everything.On top of all customer deposits, any money that was loaned to an Irish bank was included in the guarantee. That meant the government was effectively saying to each creditor and bondholder (person/company/fund/country that is owed money) that they would be paid back, in full, regardless of what happened to their original investment.The guarantee included all types of bonds, regardless of how ‘risky’ they were deemed by the borrower at the time. (Imagine somebody guaranteeing Paddy Power’s bets on Crystal Palace winning the English Premier League next year).Subordinated bondholders were covered, as well as senior and secured bondholders. The only exception was about €8.2 billion of undated junior debt.So, how much was all that?The estimated total of guaranteed liabilities was about €440 billion. To put some context on that number, it was about 10 times the national debt.Did it include ordinary people’s deposits?Yes.The Deposit Guarantee Scheme (DGS)had been increased from €20,000 to €100,000 earlier in September 2008. It was also expanded to include credit unions for the first time.But as part of the 30 September 2008 guarantee, 100 per cent of ALL deposits (regardless of the amount) was guaranteed in the six institutions.That guarantee expired on 29 September 2010. The initial DGS then came back into play, is still in place and does not have an end date.Why was it needed at that time?The financial sector was in turmoil across the world and Irish banks were being hit hard.They were losing deposits, share prices had plummeted and confidence – which is a always a vital cog in banking sectors – was at an all-time low.Although the issue of solvency would eventually emerge as the main problem, the focus in September was about liquidity. The banks – and, in turn, the government – believed the issues could be solved with injections of cash.The guarantee aimed to increase confidence, encouraging the international markets to begin lending to the Irish institutions again – at a reasonable cost of borrowing.How did other countries react?The initial reaction was bad. Europe was not happy that Ireland acted unilaterally, while the UK was worried that the government had undercut British banks. They expected savers to send a tsunami of money to Irish institutions as they were now, actually, the safest places in the world in which to place money. Why? Well, investors could not lose. The government had essentially told people that they were so confident that people would not lose money on their investments, that they would back them.Brian Lenihan’s counterpart in Britain, Alistair Darling, said it put UK banks in an impossible situation.Angela Merkel described the development as “unacceptable”, adding that the “Irish way is not the right way”.How did the banks react to it?The government’s decision gave the banks some breathing space. Take Anglo as an example. Seánie Fitz’s baby was on a cliff. It was about to go under and knew it could not last another day’s trading.The world had already seen Lehman Brothers go bust just a couple of weeks earlier so a similar fate for the Irish lender wasn’t outside the realm of reality.The recently published Anglo tapes revealed boss David Drumm talking about ‘getting the money’ in during the days following the government’s announcement.In public at the time, they were more demure putting out a message of ‘business as usual’ within the sector.Did the banks try to benefit from it?After the criticism from Europe, the government had to be careful to ensure that banks were not seen to be using the guarantee as a selling mechanism.However, it was somewhat inevitable.Irish Nationwide Building Society were given a slap on the wrist and a €50,000 fine when it emerged that Michael Fingleton Junior had sent emails to bankers in London trying to convince them to move deposits his way on the back of the guarantee.Did the guarantee work?Well, quite obviously, no.In a way, the financial system called the government’s bluff. Brian Cowen, Brian Lenihan et al. tried to fix the situation by standing firm behind the Irish banks, granting them the kind of confidence boost they craved.But it didn’t last long.It wasn’t long before the cash injections required by the banks were costing big time. Lenders then began charging penal interest rates in order to lend to the Irish government, knowing that it had to back the constantly-growing banking losses.It eventually led to the Fianna Fáil/Green Party coalition calling on the international powers – soon to be well-known, but not fondly, as the Troika – for help. €64.1 billion worth of help.When did the guarantee come to an end?Some form of bank guarantee remained in place until midnight, 28 March 2013.However, that doesn’t mean the government isn’t responsible for bonds issued while the guarantee was in place. All bonds issued between 30 September 2008 and 28 March 2013 are covered and are worth tens of billions of euro.Two of the covered banks, Bank of Ireland and Permanent TSB, issued new bonds on the last week of the guarantee. Bank of Ireland borrowed €5 billion, while Permanent TSB raised €3.065 billion, with both bonds due for repayment in March 2015.How much did it end up costing the State?€64.1 billion.In return, the State now holds a 15 per cent stake in Bank of Ireland and owns 99.8 per cent of AIB, as well as EBS (as a subsidiary of AIB), Permanent TSB* and what remains of Anglo Irish Bank and Irish Nationwide**.*The Irish Life arm of Irish Life & Permanent was sold to Canada Life**The failed institutions became the IBRC which was put into liquidation earlier this year. Read: 10 ways the bank guarantee changed our livesRead all our coverage of the 5th anniversary of the bank guaranteelast_img

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