Some advice given to the Taoiseach favoured letting one or two banks become insolvent, writes Garret Fitzgerald
ON MONDAY night the Government was faced with the question of whether to nationalise one of our six banks that it had reason to believe was about to fail, or to become the first government in the present global crisis to pledge its state's credit to guarantee bank deposits.
Of course, once the guarantee of deposits and loans had been announced by the Government at 6.45am on Tuesday, the Opposition had no alternative but to accept this - while making constructive suggestions as to how its terms might be improved.
Yet the fact that a Bill designed to enable the Minister for Finance to guarantee all deposits of six Irish institutions was bound to secure widespread parliamentary support does not mean that last Monday night this was the only course open to the Government.
We have learnt that at one stage in that seven-hour meeting those present discussed an alternative that would have involved allowing one of our six financial institutions - or perhaps even two - to become insolvent and be nationalised. This could have been accompanied by Government measures to strengthen the capital base of the surviving institutions.
And Stephen Collins, a well-informed journalist, told us in last Wednesday's Irish Times, some of the official advice given to the Taoiseach favoured this alternative approach.
Which of last Monday night's participants might have expressed these concerns?
In the Dáil last Wednesday the Tánaiste stated that "the considered view on the advice of the governor of the Central Bank and the Financial Regulator was that we would have to initiate the procedures we did".
Clearly, therefore, any alternative advice about allowing one or perhaps two banks to fail on Tuesday and then nationalising them must have come from the only other participant in those late night talks - the Department of Finance.
What we do not know is how strongly that alternative view may have been pressed. Was it put forward tentatively or as a positive counter-proposal?
Either way, the fact that it was discussed casts doubts on the claim by some Ministers that offering a comprehensive guarantee was the only solution because otherwise "the system of banking . . . would have totally collapsed".
Why might the Department of Finance have taken a different view from the regulator and the Central Bank?
First of all, the department might have felt that the €400 billion guarantee was too big a commitment. In that connection it is interesting that last Wednesday's Guardian reported that Gordon Brown's wariness about making a similar move derived from a fear that his government simply did not have the cash to back it up.
Next, the Department of Finance might have been concerned that taking on this commitment might reduce our sovereign credit rating, thus increasing interest payments on a general Government debt which had in the first half of this year already been increased by €13 billion, or 43 per cent, and which is about to be raised much further by next week's budget.
The department might also have been worried about the difficulty of restraining banks accorded liquidity guarantees from competing irresponsibly with each other in future.
It might also have had worries about keeping within the banking system one or two banks which may not be saved by a measure designed to deal only with liquidity problems.
The guarantee of deposits and most loans does not deal with solvency problems that could arise from the under-capitalisation of banks, combined with bad debts which have yet to be audited.
The Minister made this clear in the Dáil when he said the Government was not in the business of bailing out banks or bank shareholders.
The fact that the Government's action has failed to tackle the fundamentals of our banking problem was made clear on TV on Wednesday night by two of our most respected economists, Colm McCarthy and Prof Patrick Honohan (who writes on the crisis on the previous page of today's edition).
Finally, the Department of Finance might also have been concerned about the implications of the Government's action for our international relationships because of the way in which this comprehensive guarantee would create distortions of competition between banks here and banks in the EU, especially in Britain.
Should all these possible consequences of the guarantee worry us?
I believe they should. More than any other EU country we need the goodwill of our EU partners, which we have already endangered by our Lisbon Treaty vote. This is not a good time to alienate them further.
In conclusion, I sympathise with the Government's difficulty in deciding on the best course of action on Monday. It would have been very risky for it to have rejected the advice of the regulator and the Central Bank by choosing instead to allow one or perhaps two banks to fail.
Yet how well-judged was the advice it received?
That raises a much wider issue. Given that the Central Bank must have known that there was a risk of such a crisis occurring, did it consult and seek advice in good time from the European Central Bank?
And given the precedent of the Belgian-Dutch-French sharing of liabilities in the Fortis case, and the fact that one-third of the liabilities of our major banks are not in Ireland but in Britain, were the British consulted in advance about the possibility of them taking an equivalent share of liabilities in the event of a Government action with respect to an individual Irish bank or banks in difficulties?
Rather than face the drain on their deposits arising from an Irish guarantee scheme, the British might have agreed to this.