September 30th, 2008 is now etched in the memory of the Irish public as the night of the infamous bank guarantee. The decision of a Fianna Fail-led coalition had momentous consequences for all. The cabinet in haste, late at night, provided Irish-owned banks and financial institutions with a blanket guarantee of their deposits, bonds and loans amounting to €440 billion. While it bought time, it failed to provide a solution. The effort to save the banks ultimately proved futile and the cost of the rescue bid has crippled taxpayers, sent public debt soaring, and led two years later to the bailout of the State in an international rescue.
Brian Cowen's government had few contingency plans in place to contain the financial crisis that followed the collapse of Lehman Brothers two weeks earlier. After Lehman, the failure of any "systemically important" bank was seen as a risk that governments should no longer take. And, by then, Anglo Irish Bank, close to collapse, turned to the government for protection.
The government in deciding to ring fence all the Irish banks, via the blanket guarantee, gambled that this would not inflict huge losses on the taxpayer. It has cost them some €64 billion, as Central Bank Governor Patrick Honohan described it, one of the costliest banking crises in history. And for the past five years, it has presented the State with its greatest challenge, which still continues.
How did the government underestimate the scale of the problem in 2008? In part, because of assurances from the Central Bank, the financial regulator and the banks themselves that their own financial difficulties were temporary – matters of liquidity, not solvency. And in part, because the government was ill-equipped to handle a crisis, for which it was wholly unprepared despite the ominous warnings that the collapse of Northern Rock in the UK had presented a year earlier.
With hindsight, while the guarantee can now be seen as too broad and too generous, and a more limited guarantee would have been more appropriate, there was no easy alternative course of action available. To allow a bank failure might, in the circumstances, have cost even more. The forthcoming banking inquiry should help provide some clarity.
