Government action is reassuring, but the measures have to deliver in the long term, writes Stephen Collins
THE GOVERNMENT'S intervention to protect the Irish banking system from possible collapse has certainly worked in the short term. The real test of the decision, arrived at in the early hours of yesterday morning, after hours of agonised debate involving the Taoiseach, the Minister for Finance and key officials, will be whether it delivers for the banks and the taxpayer in the longer run.
Politically and economically, the downward spiral in the share prices of Irish banks on Monday required a decisive response from the Government. When the US House of Representatives compounded the world financial crisis by rejecting the bailout package for its own banks, it was even more imperative that the Government should act to protect Irish interests.
Brian Cowen and Brian Lenihan burned the midnight oil in discussions with officials, bankers and regulators to arrive at a strategy. One of the key decisions the Government had to make was whether to nationalise one of the banks, which was on the verge of collapse on Monday night, or opt for the wider strategy of doing something designed to underpin the entire banking structure.
Some of the official advice given to the Taoiseach and Lenihan favoured letting the weakest link in the banking chain fold, with the State then stepping in to acquire it as happened in Britain with Northern Rock. This line of action was supported by those advocating the "moral hazard" argument, that the taxpayer should not be asked to reward bad banking practices.
However, senior politicians took the view that far from bringing an air of realism into the equation, a decision to allow one bank to go down would simply fuel further attacks on the two big banks, which are fundamentally sound. This could ultimately have led to the nightmare scenario of the whole banking system being threatened, with incalculable consequences for the economy and society. In the longer term, one of the weaker banks may yet have to be taken over by the State and that option is still alive as a last resort.
Of course, there are outstanding questions about the kinds of guarantees being put in place and the ultimate exposure of the taxpayer as well as questions about past mistakes by banks, regulators and the Government itself.
The critical thing, though, was not to do as the Americans have done and hold a long-running debate about the issue, creating more confusion and worry. It was vital to make a clear decision and to stick to it.
For a Government that has been on the back foot since the disastrous Lisbon referendum defeat, the decisiveness of the approach to the banking crisis was reassuring. The response of the Irish stock market yesterday was a positive development and, while it is far too early to start counting chickens, things at least appear to be getting better rather than worse.
Of course, the public reaction is probably very different from that of the stock market. There is a great deal of understandable public hostility to the notion of the taxpayer being asked to take responsibility for the mistakes of the bankers and the regulators who allowed the mess to develop in the first place.
The Government too has to take some responsibility for the crisis. While there is nothing it could have done to cope with the international credit crunch, the fact that Irish banks were so exposed had a lot to do with the way the Government irresponsibly fanned the flames of the property boom and then did nothing to contain it when it was clearly out of control.
Opposition parties have united in their criticism of the Government's economic record, but their reaction to the banking initiative has been quite different.
Fine Gael posed a number of questions about the Government package, with Richard Bruton seeking to establish if the Government would appoint personnel to the risk management committees of the banks and asking if the excessive bonus payments to executives in the affected banks would continue and if dividend payments to shareholders would be halted.
Labour took a more populist line, with Eamon Gilmore accusing the Government of exceeding its authority by failing to consult the Dáil before it announced its package. "The biggest blank cheque in history has been written and no one knows what terms and conditions are attached?" he said.
Ultimately, only time will tell whether the plan works and much will depend on what happens outside the country. For the moment, though, the plan does appear to have bought that precious commodity of time.