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Here is another possible scenario:

An irish bank had seen its share price drop so much that it was vulnerable to a takeover bid (presumably by Santander). The losers in this case would have been: the management (in that order).

The government decided (without informing, let alone consulting, the ECB or the Commission's competition authorities) to guarantee the debt of all 6 banks by announcing the guarantee.

This scenario makes the Irish government look even worse.

Can you think of a scenario that makes the Irish government look good and in which the management of the banks is not the primary (or sole) beneficiary?

In any case the government is disingenuous as they claim they are not "taking risks in public enterprise" as if guaranteeing debt were not exactly that.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Carrie (migeru at eurotrib dot com) on Fri Oct 3rd, 2008 at 01:12:15 PM EST
[ Parent ]
So the question becomes - was the Government just plain stupid, or why did the Bank managements hold so much influence over them.  You could argue that the management did a good job for their shareholders as well, and the Irish government (and more particularly, the Civil Service,  is ideologically opposed to dismissing management or senior staff except in the case of moral turpitude (and even then, not really).

So it comes down to one great big bet that we can ride out the storm - in which case taxpayers may get some marginal benefits in the form of debt insurance payments - in return for taking on enormous risk.

Ireland is probably getter placed to take on this risk - with a 30% debt/GDP ration - and becoming very dependent on international financial services.  So it was probably also a calculation that the guarantee would give Ireland a competitive advantage vis a sis (say) Greece with a much higher national debt.

The really interesting question is the impact on the big boys - UK, Germany, France - who are probably extremely annoyed at the substance, never mind the manner of the move.  It puts them in a very difficult position.   One more example of how globalisation has moved ahead of the Global regulatory frameworks required to manage it.

Somebody could get seriously hurt here - and it will probably be the financially smallest and weakest (as usual).  It certainly looks like high stakes poker.  What's to prevent the Irish Banks from investing their huge inflows of money in a speculative way?

Vote McCain for war without gain

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Oct 3rd, 2008 at 01:44:39 PM EST
[ Parent ]


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