Dail bail deal fail??

The Irish parliament, the Dail, has rubber-stamped the Government's plan to insure all deposits in six major Irish banks for the next two years. The deal has caused ructions all over the place. The EU is complaining that it wasn't consulted. It is investigating whether the guarantee constitutes illegal state support, in which case Ireland might face financial penalties. Non-Irish owned banks operating in the country are complaining that they are being discriminated against. Banks in the UK are worried that savers will move money into the Irish banks in order to take advantage of the guarantee, as the UK itself only guarantees £50,000 per depositor, just increased from $35,000. There are signs this is indeed happening. There is even disquiet in Ireland itself, with unions and the political opposition arguing that the Government should not have given the banks a blank cheque.

I have more than the insured limit in a UK bank, but I'm not tempted to move any money to Ireland, because I'm not sure that the Irish Government's guarantee is worth the paper it's printed on. The total value of the guarantee amounts to about three times Ireland's annual GDP. Could the Government ever make good on its guarantee if push came to shove?

It's unlikely that all the banks would fail at once -- though the guarantee proposal reportedly came about because there were fears that two of the six would go under this week, so nothing's impossible. Let's suppose that just one of the six failed and that its deposits accounted for 50% of Ireland's GDP. That's still a huge amount of money to borrow. I don't just mean it's a lot to borrow quickly. It's a lot to borrow, period. By way of comparison, years of diligent overspending by the UK Government have resulted in a national debt just above 40% of GDP. It would take Ireland a long time to raise the 50% of GDP it needed to pay out all the depositors. The consequences for its national credit rating of even trying to do so would be disastrous.

And here's the real fly in the ointment: Ireland can't ask its central bank to give it a quick hand by printing money. As a member of the Eurozone, Ireland has given away that power to the ECB. Given the chilly reception that the EU has given to the guarantee scheme, not much help is likely from that quarter.

The guarantee has given Irish bank shares an instant boost and eased the liquidity crunch in the short term. If I was an Irish bank depsitor, though, I'd be praying that I never had to call on the Government to stump up the dough.