Scoop has an Ethical Paywall
License needed for work use Register



Cablegate: The Bank Guarantee: An Irish Solution to an Irish

DE RUEHDL #0556/01 2831021
P 091021Z OCT 08

Thursday, 09 October 2008, 10:21
C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000556
EO 12958 DECL: 10/09/2018
DUBLIN 00000556 001.2 OF 002
Classified By: Pol/Econ Chief Theodore S. Pierce. Reasons 1.4 (b/d).
1. (C) Summary: On September 29, the Irish government announced plans to back deposits in all Irish-domiciled banks. Foreign banks with significant Irish operations were initially left out of the scheme but some look now to be included. Irish government officials maintain that impaired assets at Irish banks are still relatively insignificant and are mostly confined to commercial property loans. They say that regulatory oversight of the financial sector will be tightened and that the drying up of credit to Irish banks forced the decision to guarantee all deposits. The crush on Irish banks could not have come at a worse time -- immediately preceding next week’s presentation of what is widely expected as the most austere government budget in years. End Summary.
A Crisis Unfolds
2. (U) Following a late-night September 29 meeting with leading bankers -- Central Bank Governor John Hurley and Chief Executive of the Financial Regulator Pat Neary -- Prime Minister Brian Cowen took the decision to guarantee the deposits, loans, and obligations of the six Irish-owned Banks for two years. The next day Finance Minister Brian Lenihan and Hurley briefed their key European counterparts. During a marathon session (almost 22 hours, a record) on October 1, the Irish parliament passed legislation that would make the guarantee operational. On October 2, President Mary McAleese signed the Credit Institutions (Financial Support) Bill 2008 into law. On October 6, Lenihan faced questions about the scheme from other EU Finance Minister at an ECOFIN meeting in Brussels and the Central Bank and the Regulatory Authority met to finalize the terms of the plan. On October 8, the Irish Cabinet met to discuss the plan but delayed announcing anything until the EU gives its formal approval, which is widely expected to happen early next week.
A Perfect Storm
3. (C) Econoff and visiting EUR/WE Desk Officer met with Central Bank and Financial Services Authority officials Gordon Barham, Maria Woods, and Billy Clarke on October 6 to talk about the government’s bank guarantee plan. Clarke said that the regulator had been carefully watching the banking sector as the months-long credit contraction unfolded. Explaining the seemingly sudden pressure on Irish banks last week, he said a “perfect storm” of external events related to the credit crisis had dried up the traditional sources of financing for Irish financial institutions. Barham maintained that the level of impaired assets in the system stood at between 0.5 and 0.8 percent and these are mostly confined to loans to commercial property developers. When pressed, Barham said the media had exaggerated the level of problem assets and those that existed could be managed.
4. (C) Clarke hesitated to make predictions but said that it is “likely” the regulatory system would move from one that relied heavily on bank management working within broad guidelines laid down by the regulator to a “rules-based” one. An example he gave was that the regulator may be given the authority to limit the percentage of the banks’ loan books that are extended to any one sector (i.e. commercial or residential property). Barham and Clarke said that the banks would not be allowed to securitize and sell impaired assets under this scheme. Rather, the banks, the regulator, and other government agencies would have to figure out how to “unwind the problem assets without exposing the Irish taxpayer to undue risk.”
5. (C) Econoff spoke with Kevin Cardiff, Second Secretary General at the Department of Finance, who has been deeply involved in putting together the guarantee package. Cardiff echoed the regulator and pointed out that auditors contracted by his Department to look at the books of at least two of the institutions under pressure came away with “a favorable impression of the loan books.” While he admitted that the amount of “speculative loans, or those that are not currently productive, is not insignificant,” he stressed that all involved in putting together the package were confident that the government would not be forced to bail out the banks.
6. (C) Cardiff said that credit to the Irish banks “virtually dried up” on September 29 and that the government had to step in to salvage the Irish financial sector. The genesis of this was classic “herd mentality” based mostly on rumor and innuendo about Irish banks rather than any hard facts. However, fighting the herd became impossible, he added. He added that non-Irish institutions with significant Irish
DUBLIN 00000556 002.2 OF 002
operationsXXXXXXXXXXXX would likely be included in the scheme. XXXXXXXXXXXX
7. (C) Although the move did not win any friends across Europe, Cardiff said that there is a gradual realization in Brussels that each country should be allowed to tailor its response to local conditions. He characterized the Irish government’s discussion with EU officials as “positive” and indicated that the Irish solution would soon gain approval. In an aside, he pointed out that Irish Finance Minister Brian Lenihan and his British counterpart, Alistair Darling, had engaged in a very constructive exchange of views. Cardiff continued that the prevailing mood in Europe is that “large-scale failures just make things worse” and that he expected more Irish-like solutions. He warned, though, that the battle had just begun.
8. (C) Against the background of a steep slump in the property market and anecdotal evidence we have picked up, it may be that government officials are being a bit optimistic in their assessment of the level of impaired assets. It begs the question: if the level of impaired assets is not a problem, why the sudden pressure on Irish banks? Perhaps the perfect storm answer is the right one. Whatever the answer, the Irish government has its work cut out for it as it works with the private sector to stop the bleeding and then rebuild the Irish financial sector. With the government maintaining that the Irish banking sector nearly collapsed during the past two weeks and the announcement of what is expected to be a very draconian 2009 government budget next week, Irish economic policymakers are facing their most significant challenge in decades. FOLEY

Advertisement - scroll to continue reading

Are you getting our free newsletter?

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.

© Scoop Media

Advertisement - scroll to continue reading
World Headlines

UN News: Aid Access Is Key Priority

Among the key issues facing diplomats is securing the release of a reported 199 Israeli hostages, seized during the Hamas raid. “History is watching,” says Emergency Relief Coordinator Martin Griffiths. “This war was started by taking those hostages. Of course, there's a history between Palestinian people and the Israeli people, and I'm not denying any of that. But that act alone lit a fire, which can only be put out with the release of those hostages.” More

Save The Children: Four Earthquakes In a Week Leave Thousands Homeless

Families in western Afghanistan are reeling after a fourth earthquake hit Herat Province, crumbling buildings and forcing people to flee once again, with thousands now living in tents exposed to fierce winds and dust storms. The latest 6.3 magnitude earthquake hit 30 km outside of Herat on Sunday, shattering communities still reeling from strong and shallow aftershocks. More


Join Our Free Newsletter

Subscribe to Scoop’s 'The Catch Up' our free weekly newsletter sent to your inbox every Monday with stories from across our network.