Ireland’s ISEQ Financial index jumped 27.65% on Tuesday following the Irish government’s announcement that it will guarantee, in full, the deposits in the six Irish-owned banks and building societies, as well as their borrowings, for two years. Following the US Senate’s rejection of the $700bn bailout on Monday evening, it seemed that Irish stocks were likely to face another swan dive on Tuesday after Monday’s worst single-day performance in the ISEQ Index’s 25-year history. Anglo Irish Bank had lost 46% of its value on Monday, its biggest decline in two decades, largely as a result of the bailout of its German competitor Hypo Real Estate. Finance Minister Brian Lenihan felt compelled to act in the face of what he deemed “a huge liquidity famine” for the Irish economy.
While the move is attracting foreign deposits to Irish banks (cash is king), the move is certainly controversial. The government is effectively exposing the taxpayer to the collective liabilities of the six institutions – €400bn – while Irish GDP is approximately €190bn and the national debt stands is at €45bn. This constitutes a commitment of roughly 2x GDP. To put this in context, the proposed $700bn bailout in the United States amounts to 5% of U.S. GDP.
Mr. Lenihan insists that the government is not in the business of bailouts and will be charging the banks for the guarantee. The concentration of risk that the government is placing in the banking sector is massive and, as a result, raises questions about the viability of the economy. As a long-standing member of the European Union, Ireland’s guarantee has sent ripples throughout Europe. The scheme is said to give Irish banks an unfair advantage over foreign competitors. Furthermore, the fact that the guarantee applies to branches within Northern Ireland and Britain could enhance the perceived advantage. Authorities in Brussels are investigating whether or not the guarantee constituted illegal state aid.