Just shy of the second anniversary of the Lehman collapse, the Irish government last week issued its latest plan for Anglo Irish Bank. It reveals how little Dublin – and most other governments – have learnt from the crisis.
Back then, there were good reasons to offer taxpayer crutches to toppling banks. Contagion could bring the system to its knees. Panic made market valuation useless: even solid banks looked wobbly on a mark-to-market basis. It made sense to tide them over until the insolvent institutions could be distinguished from the illiquid.
Uncertainty is now receding. Unhappily, what is emerging in Ireland is how staggering bank losses are. It is time to let them fall where they should: on unsecured creditors once shareholders are wiped out. But Irish leaders are prolonging the uncertainty in the hope that zombie banks will, Lazarus-like, come back to life.
Dublin has poured €23bn into Anglo. The new plan – to split deposits from a “recovery” bank with loans not yet transferred to the government – looks like another round of three-card monty. It does not clarify the final size of the hole to be filled (S&P thinks it can reach €35bn), and continues to make citizens protect bondholders from their own folly.
Dublin fears that cutting loose Anglo’s bondholders will kill demand for Irish sovereign debt. The opposite is true, as record-high sovereign spreads show. Its huge fiscal deficits are manageable – just. It is the open-ended exposure to private liabilities across the banking system that drives up sovereign yields. Dublin must get its priorities right.
Irish depositors must be protected, but they fund less than half of the €776bn domestic banking balance sheet. Bondholders are owed €98bn, some of it guaranteed. Explicit state guarantees must be honoured. But the extension of a scheme to guarantee new debt issues to maturity forces taxpayers chained to a sinking ship to build lifeboats for exiting creditors.
The guarantee scheme should be cancelled for new issues, and sweeping resolution authority put in place immediately. It should apply to any bank that cannot refinance itself privately, and ensure that viable business continues while assets secure the claims of depositors and already-guaranteed creditors. Any shortfall thus crystallised should be put on the public balance sheet once and for all.
This will be painful. But investors who know the bleeding has stopped will soon prove that there is life after death.
Reading this, it strikes me as interesting how quickly we’ve gone from a situation where the government’s defenders were complaining about domestic malcontents and pointing to increasingly receptive audiences overseas to one where the exact same people are blaming the international press for our problems on the grounds that they don’t understand the situation as well as those who are living here.