Thursday, October 2, 2008

Ireland Rolls the Dice on Financial Bailout

Ireland has launched a full-scale rescue of its financial system, issuing a state guarantee worth €400bn (£316bn) to cover the key liabilities of its biggest banks and mortgage lenders.

The Irish government guaranteed all deposits and debts of the country's major banks, one day after the Irish stock market plummeted 13%, nearly twice the decline of the Dow Jones industrials according to the LA Times

"We have to create confidence," Finance Minister Brian Lenihan said on RTE Radio, according to Bloomberg News. "We can't bail out a particular bank. That wouldn't be right. What we have decided to do is give a general guarantee that the banks can lend in security and safety."

According to the Guardian newspaper, "desperation can sometimes engender inspiration. During Monday night, the Irish government was facing the potential collapse of the Republic's banking system. Shares in Anglo Irish Bank had lost half their value in a single session, with similar sharp falls in other publicly listed Irish banks. Real concerns about the stability of Ireland's banking system – prompting a signal from the government a week earlier that it would "intervene" in the event of a bank collapse (Irish Times) – that had been percolating for months finally boiled over.

The goal is to jumpstart international confidence in Irish banks, to help unfreeze interbank money markets and give potential lenders confidence based on the Irish government's guarantee.

Domestic reactions to the bailout scheme were broadly positive. Although there were warning voices about the enormous risk potentially being taken on by the state – the €400bn commitment is more than twice Ireland's GDP and nearly 10 times its entire national debt – and critics on the left demanded that the Irish taxpayer be compensated for the risk with an equity stake in the institutions.

Other observers put the deal in its dramatic historical context, comparing it to the Irish decisions – also born of desperation – to open up its economy, slash taxes and grab foreign investment, that led to the Celtic Tiger phenomenon of supercharged Irish economic growth in the 1990s through the early part of this decade.

But for a government that seemed impotent and paralysed in the wake of the defeat of the Lisbon European reform treaty referendum in June, the radical action has proven to most Irish observers that their government – unlike most others in the western world – is willing to try whatever it takes to get through this crisis."

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