Bank guarantee almost universally slated but was the least worst solution
Opinion: Critics have failed to supply evidence that other solutions would have worked
Anglo Irish Bank: default was imminent and it was felt that other banks would also soon be in deep trouble.
Five years on from the bank guarantee decision of September 29th, 2008, debate continues to rage as to the role it played in Ireland’s financial and economic crisis. To many, the guarantee was a fatal error that led to a ballooning of Ireland’s debt and imposed huge costs on the citizenry for years to come.
This paradigm is simplistic and misleading. The big mistake was not the guarantee but the earlier policy errors and misjudgments that led to the property bubble, insolvency of the banking system and Ireland’s budgetary collapse. Defending the guarantee does not in any way imply a defence of these catastrophic failures.
The critical element underlying the guarantee decision was the firm view that no Irish bank could be allowed to fail, that is, closing its doors and defaulting on liabilities. Contrary to some assertions, this stance was not a diktat of the European Central Bank. It was the unambiguous policy of the Irish authorities ever since the UK Northern Rock crisis in mid-2007.
This policy was based on the experiences of widespread bank failures elsewhere that caused economic and financial chaos, in some cases (most recently in Argentina and Indonesia) accompanied by major social and political unrest, including violence and deaths. As panic began to engulf financial markets world wide during September 2008 (including in Dublin), there was a firm conviction that any Irish bank could not be allowed to become the Lehman Brothers of Europe.
Those who have forcefully criticised the decision have yet to present convincing arguments in favour of specific other options that would have succeeded in preventing a collapse of the Irish financial system at significantly less cost. Careful examination of all the possibilities available at the time leads one to conclude, as did the Honohan and Nyberg reports (and my recent book jointly authored with Antoin Murphy), that some form of comprehensive guarantee could not have been avoided – it was the least worst alternative.
Some have suggested that the decision should have been delayed in order to seek some better solution, perhaps involving European partners. However, faced with imminent default by Anglo Irish Bank the following morning and the prospect that the other banks would then very rapidly face similar intolerable liquidity pressures, it was imperative to take decisive and unambiguous steps that would be easily understood by the markets and restore confidence quickly. In the absence of such action, it is very likely that, after a short period of intense turmoil, the government would have been forced to introduce some form of guarantee. Meanwhile, Ireland’s financial reputation would have incurred incalculable damage.
Nor was there any reason to believe in 2008 that the ECB would alter its firm position that no bank should be permitted to fail and that the responsibility for intervention lay with national governments. Indeed in the subsequent five years no euro zone bank has failed apart from Cyprus recently. Moreover, possible pan- European arrangements that could involve burden sharing in dealing with troubled banks are still quite far from being agreed.