Advisers told Lenihan bank guarantee could be 'mistake'

The Government was advised that a blanket bank guarantee could be a "mistake" shortly before it introduced the scheme in late September 2008, according to financial documents released by the Oireachtas Public Accounts Committee today.

Financial consultants Merrill Lynch told the Minister for Finance that such an extensive guarantee over liabilities at the State’s main banks could “hit the national rating” and allow poorer banks to continue in operation.

Details of the meeting, which took place four days before the guarantee was announced on September 30th, are contained in a Merrill Lynch memorandum.

Merrill Lynch advised the minister against a policy of liquidation or letting a bank become insolvent, saying “this was the worst thing that could be done” as it would accelerate trouble for all other institutions.

In another document from Merrill Lynch, dated September 29th, the Government was again warned on a policy of underwriting the liabilities of the six main Irish lenders.

The scale of the guarantee could exceed €500 billion, Merrill Lynch said in an emailed document detailing the pros and cons of various interventions.

“This would almost certainly negatively impact the State’s sovereign credit rating and raise issues as to its credibility,” the consultancy said.

“The wider market will be aware that Ireland could not afford to cover the full amount if required. It might also be poorly perceived by other European states if they come under pressure to do the same as liquidity flows migrate,” it added.

Merrill Lynch proposed an alternative to the guarantee scheme in the form of “secured lending scheme” for banks whereby commercial property could be exchanged for Government bonds or cash.

The Government has been widely criticised for the extent of its guarantee, announced at the end of September 2008, because of the potential cost to the State.

Taoiseach Brian Cowen and Minister for Finance Brian Lenihan have long maintained the Government followed the best advice given to it at the time.

In its email, Merrill Lynch said it was important “to stress that at present, liquidity concerns aside, all of the Irish banks are profitable and well capitalised”. However, it warned liquidity for some lenders would run out in days, rather than weeks.

It said Anglo Irish Bank had recently approached the Central Bank with a proposal to create a new lending facility that would involve exchanging commercial mortgage assets in return for cash.

It said Anglo was “rapidly approaching the point” where it had exhausted all possible sources of liquidity available via the market.

Mr Cowen insisted today that the Government had the best interests of the country in mind when the decision to offer the blanket guarantee was made.

"There was no question that the guarantee decision was the right decision and I stand by that,"he said.

Mr Lenihan said it was wrong to suggest that Merrill Lynch recommended one option over an other. He said the only option Merrill Lynch discounted was the option of allowing an Irish Bank to fail.

"This is the option that Fine Gael has advanced since 2009," Mr Lenihan said.

Fine Gael said the Taoiseach and Mr Lenihan had caused untold damage to the Irish economy.

"The new facts rubbish the images conjured by the Taoiseach and Minister for Finance of a Government being bounced in the early hours of September 30th into the catastrophic decision to offer a blanket guarantee to Anglo-Irish Bank on the basis of poor advice by the ill-prepared Financial Regulator," said Mr Noonan.

"They confirm the judgment of Central Bank Governor Patrick Honohan that, even in hindsight, the blanket guarantee was a mistake."

Mr Noonan called on the Taoiseach and Mr Lenihan to answer why the advice from Merrill Lynch was not acted on and who was pushing for a blanket guarantee.

He added:"At the very least, both the Taoiseach and the Minister for Finance are guilty of misrepresenting the nature of the advice given to them on the guarantee, and knowingly exposing the Irish taxpayer to unknown but potentially huge losses in Anglo Irish Bank."