The government has already bailed out Irish banks. Now it has to do so again. The reason for this is that it wasn’t done properly the first time. The guarantee was simply no help. Although it provided liquidity (i.e., so that the banks could get a few euros on tick to carry on trading) it did nothing to deal with the losses that have resulted from the fall in the value of property and the resulting fall in value of the loans secured on property. The banks need capital invested in order to cover this.

Until they get the money, they won’t be able to lend money to businesses, and that will result in unnecessary bankruptcies and undermine whatever growth there is in the economy..  I am just after hearing about a business that can’t raise a ten thousand euro overdraft – the lack of facilities will stop this business from growing. (Bill Cullen agrees with me, so obviously it must be true.)

There is also a deeper problem. There is little innovation in banking and an awful lot of old nonsense. It needs new blood and serious changes. The government recognises this in its decision to appoint new people to bank boards, but it doesn’t look to be a very effective move. For one thing, it’s hard to find knowledgeable people who aren’t already involved in a bank and therefore conflicted, and for another, it’s hard for the directors to actually do anything once appointed.

What is really needed is more and better competition in banking. But instead of stimulating that, the government has now effectively made it impossible to enter the Irish banking market, since it is unwilling to advance its guarantee to new banks. It has also made it impossible for existing banks to innovate very much, because they are now under the constraints that the new guarantee brings.

The government seems to think that foreign money will save the day. If it does, it could create a whole raft of new issues to deal with, and further government guarantees are likely to be required all the same. It also seems obvious that if it were possible to raise foreign private capital so easily, that it would have happened in the UK already. But it hasn’t. Barclays, which didn’t take up the UK Treasury’s recapitalisation scheme, is in a major spot of bother over its own bright idea, to bring in middle eastern investors.
It is an imperfect problem, and there are no perfect solutions. But the government needs to act reasonably quickly and accept the scale of the problem in order to avoid the meltdown spreading fa beyond the building sector. Everyone needs to be realistic here, even if the truth (that the government is going to have to somehow take over a pile of overvalued assets) is not very attractive.