Could banking crisis have cost less, and how much might we eventually get back?

Patrick Honohan, the Central Bank governor, calculates that the banking crisis will end up costing us around €40 billion. Michael Noonan, the Minister for Finance, reckons that eventually the cost might be €35 billion.

With such big numbers in play – up to 20 per cent of our total national debt – no wonder we are still fighting about whether it could have been less, and how much we might eventually get back.

Thousands of words have been written about the night of the guarantee, and the banking inquiry will write a few thousand more. What happened that night is important.

But it is nothing like as important as the failures which allowed the bubble to inflate in the first place and meant that even late in the day, when warning lights were flashing internationally, the risks here were not spotted.

By autumn 2008 the die was cast, the banks were bust, and it was a question of damage limitation.

There were things that could have been done when the guarantee was granted, or shortly afterwards, to reduce the bill, and it is clear that later attempts to impose some pain on senior bondholders should have gone ahead. But none of this would have stopped our national bankruptcy.

Honohan argued persuasively at the inquiry that Anglo should have been closed much more quickly. But even if Anglo had been wound down later that September it would only have meant a limited cut in the final bill.

The State could simply not have walked away and washed its hands. This would have left €50 billion in retail deposits exposed and put the whole system in peril.

We couldn’t just have closed down Anglo, paid back the people we wanted to repay, and declared that everyone else was a speculator and should be burned.

Here we start to follow the trail back. A clear choice was made in the months leading up to the guarantee not to draw up the kind of special legislation which allows bust banks to be closed and losses to be allocated to various classes of creditors, including bondholders. This would have made the Honohan strategy of a quick closure much easier to effect. It could have saved us some cash. Instead an emergency nationalisation plan was put in place, one which we are now told minister for finance Brian Lenihan wanted to use on the night for Anglo and Irish Nationwide.

Scale of the hole

The decision was made not to use it, one presumes, because no one realised the scale of the hole in the bank balance sheets. Or maybe there was a fear of what lay beneath in Anglo and Nationwide?

There is only one indication that I am aware of that there was official suspicions of a hole emerging before the guarantee.

In notes of a meeting held five days before the guarantee, David Doyle, then secretary general of the Department of Finance, scribbled that "on some assumptions" there could be a capital hole of €8.5 billion in Anglo and €2 billion in Irish Nationwide. This was an underestimate, of course, but remember that five months after the guarantee PWC still said Anglo had enough capital.

In the calculations now being made about how much we might get back from the €64 billion cost of the bank bailout, the €35 billion cost of bailing out Anglo and Irish Nationwide is counted as money we will never see again. So how much we get back depends on what we might recoup from selling State stakes in AIB, Bank of Ireland and Permanent TSB.

Noonan has said that, at a minimum, he hopes to recoup the €18 billion the current Government put in to these banks but that, eventually, he is optimistic that the full €29 billion put into the surviving banks by the State might be recovered.

What the exact figure ends up as will depend largely on how much can be raised from gradually selling down AIB. This would provide welcome cash back to pay down debt, though we should remember that money received in future is not worth anything like the same amount spent in the past – and nor can it ever compensate for the huge knock-on costs of the collapse to the public finances and the economy.

Selling the stakes of the surviving banks in the market is the clearest way to get cash back as hopes raised after the June 2012 summit that the EU rescue fund might take on the bank stakes and pay us for them are no longer realistic.

The rules put in place subsequently to allow the EU fund to recapitalise banks are restrictive,and Ireland, “the fastest growing economy in Europe”, is not seen as needing help in any case.

Long-term liability

But the remaining cost of the €35 billion spent to bail out Anglo and Irish Nationwide and how it all landed on the Irish State continues to rankle and is a significant long-term liability for the State.

Next weekend's Greek election could, if Syriza is elected, bring the issue of debt relief back on to the agenda. But while Greece could get some kind of deal, suggestions of a wider process to look at debt in the periphery will be fiercely resisted by the creditor countries.

The crisis has taught us that Europe will only do what it has to do and solidarity only goes so far. It appears that even the design of the quantitative easing programme, which may be announced next week, will leave the risk with individual member states.

In terms of the bank bill, the battle to secure “something back” for Ireland must continue. But for the moment the estimate that the bailout is going to cost us about €40 billion looks about right. Hope of a “game changer” from Europe to cut the bill has been replaced by the reality of chipping away at it under our own steam.