Liquidity would have been maintained in Anglo by the unlimited deposit guarantee. This is what the Swedes did to keep their banking system going.

The problem is that we already knew that bad banks with shoddy business models would be expensive to resolve. Hypo, Sachsen and Northern Rock had already proved that point. Only Sachsen has significant subprime exposure.

Mr Honohan for sure makes that point. Otherwise he would not comment on how unusual it was to guarantee existing bond debt.

The guarantee is the only reason. At least, the only reason that doesn’t have the words “fraudulent” or “crony” in it. And then only by virtue of it being a step removed by the veneer of Parliament.

Fair point but are you not looking at this with the benefit of hindsight? To be fair to the politicians, right up to the night of the Guarantee, they were being told by their experts in the FR and Central bank that they were dealing with a liquidty crisis and not a solvency crisis. Preference shares wouldn’t have saved Anglo at that stage as they had zero liquidity. They would not have seen close of business the next day.

I am not saying the Guarantee scheme was perfect or even ideal but it is important to note the conditions that the decision was made under. Ireland may have went further than other European Countries but I can’t argue when I think back to those days that something decisive like this shouldn’t have been done. Like I say, other Countries had done similar things. Northern Rock was not systemically important. It was roughly the same size as Anglo so was only a medium sized bank in the UK. By saving NR at that time, the UK Government basically committed itself to not allowing any bank debt defaults. The Germans did the same with Hypo, IKB and Sachsen LB. There is little doubt that at that time, no European Country was going to allow a bank default on it’s debt if at all possible.
Saying that the Guarantee in Ireland is a bigger percentage of GDP than other Countries is not a valid argument. Ireland can’t afford the Guarantee and the markets know that. If they believed that Ireland faced an actual liability of €400 billion, we would be bankrupt by now so it doesn’t come into it.
The only way you can say that the Guarantee has cost this Country very dearly is if you believe that Anglo should have been allowed fail and senior debt holders made pay. I don’t see how that was possible and I don’t think even Patrick Honohan suggests that is what should have been done.
The banking bailout has cost this Country dearly but the Guarantee is not the reason.

Letting Anglo limp along until it was safe and possible to dismember it was an option that should have been explored.

I take your point but pumping a few billion recap into Anglo would have meant the bank being on state ownership anyway so even at that stage it is unlikely the government would have forced losses onto senior debt holders even with a resolution scheme in place. In the same way that even now, the UK government is still protecting senior bond holders even though they have s resolution scheme in place.

Ah, the easy ones first! Without the guarantee of existing debt, the government pumps a recap of a few billion into Anglo says grand now off you go. In the meantime the government pushes through a resolution scheme. Meanwhile, Anglo goes TU anyway, as it is more baskety than a woven reeds thing on the arm of an old lady. In the meantime, the markets and everyone else have adjusted to the fact that Anglo is reeking. Anglo goes bust. Everyone goes “ho hum, well that was unexpected”. The new resolution scheme kicks in - there’s 22 bn saved.

Thanks very much, I’ll have a sweet sherry.

Sure there would have been problems forcing losses on senior bond holders even if they weren’t guaranteed, but it is likely that, particularly in the case of anglo (+INBS?), that buy backs below par for some of this debt would have been easier to achieve.

Together with the fact that anglo was (arguably) not essential to the payments system, the gov’s negotiating position would have been strengthened, and significantly so.

And what justification is there for still not having the legislation to deal with hopeleslly insolvent banks?

I think Hypo and IKB to name but two could be comparable.

How has the guarantee of the exisiting bonds cost the Country dearly? Even if the guarantee was not in place, it is unlikely that senior bondholders would have been asked to take losses due to the absence of a resolution scheme for the same reasons that they weren’t made take losses in other countries.

I would say none of the other countries have banks that are as hopelessly insolvent as Anglo, INBS and maybe even AIB.

Besides the decision to guarantee subordinated bonds which I don’t think we will find a single person willing to defend, the biggest mistake as pointed out by Honohan was guaranteeing existing bonds.

It added nothing to the stability of the system and has cost the country very dearly.

In a closed capital market, banks would only have been able to lend on the basis of (Irish) creditors - mostly depositors. Hence, the volume of loans would have been curtailed and the housing boom stemmed.

Once the drug of cheap foreign money is made available, the bubble starts to swell. And then it popped.

So why on earth would we want to put in place (costly) measures to ensure this flow of cheap money could continue?

That’s like when you find someone with a drug overdose, and instead of giving him emergency treatment, the A&E crew hooks him up to some more heroine…