Concerns arise about Irish ‘blank check'

Ireland's decision to guarantee deposits at Irish-owned banks looks to some like a banking crisis masterstroke – an emergency measure that could force countries across Europe and beyond to follow suit.

But neighbors complained Wednesday that the move, announced Tuesday, has weakened confidence in their more modestly insured banks and encouraged nervous savers to shift money to the new safe haven of Dublin.

They called on European Union competition authorities to force an Irish retreat – even as policy-makers in London, Paris and Washington debated hefty hikes to their own countries' guarantees. The revised U.S. bank bailout before Congress includes an increase in the insured limit from $100,000 to $250,000.

“The simple answer is: Yes, what the Irish have done should be a template for others to follow,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, where shares in Irish banks enjoyed their second straight day of strong gains following sharp falls Monday.

That Irish blank check for deposits and interbank loans amounts to a maximum estimated liability of $560 billion – just to repay the debts and deposits of six banks. That's double the country's annual gross domestic product, nine times the national debt and $135,000 per citizen.

But Ireland's leaders themselves have stressed they made the unprecedented promise only because they calculated that by doing it, shares would rebound, foreign capital would flow in, and they wouldn't have to spend taxpayers' money bailing out a bank.

Prime Minister Brian Cowen said he had “not handed over any money to any bank. I have provided the reputation of this state to the banks.”

Several economists at home and abroad cautioned that Ireland's example might be appropriate only for other small countries with a handful of key financial players, not hundreds.

“Ireland gets kudos, and rightly so, for acting before we got past the point of no return for a particular player here. But I'm not sure you could replicate this approach across Europe,” said Dan McLaughlin, chief economist at the Bank of Ireland, one of the six institutions receiving government backing.

“The likes of France, Germany and Italy would have hundreds upon hundreds of banks. So their liabilities would be astronomical, and their national credit ratings are not as good as Ireland's,” he said, referring to Ireland's status as a country carrying a continent-low percentage of debt.

The EU requires a minimum $28,000 protection on deposits. France guarantees $100,000, Italy $145,000 and Norway $340,000.

Some economists warned that other countries might regret following the Irish.

“Acting to maintain faith in the financial system is understandable,” said Philip Shaw, chief economist of Investec in London, “but most governments would be loath to follow the Irish example.”

Shaw laughed when asked whether Ireland was now a safer place to deposit money than Switzerland, where bank guarantees top out at just $27,000.

“If it was really that smart to proclaim an unlimited guarantee,” he said, “more governments would have done it already.”