Did the Irish just end Globalization?

Bailout legislation protecting domestic deposits in Irish national banks was signed into law by President Mary McAleese at 3:30 PM (Irish time).

President Mary McAleese has this evening signed legislation giving effect to the Government's €420 billion bank guarantee scheme.

A single-line statement from Áras an Uachtaráin just after 3.30pm said Mrs McAleese had signed the Credit Institutions (Financial Support) Bill 2008 into law.

Unlike the US FDIC or the British Financial Services Compensation Scheme, Ireland has had, until today, a deposit insurance scheme to protect only something like the first €20,000 deposited by individuals into banks.

Key to the new scheme developed by the Irish government is the exclusion of non-Irish national banks operating in the Republic of Ireland. For example, although San Francisco based Bank of America operates in Ireland, they are not covered by the deposit insurance scheme. Which means that while deposits held in a Dublin branch of the Bank of Ireland are covered, those in a Dublin branch of the Bank of America are not.

This creates a massive incentive for a bank run on the Irish subsidiaries of international banks, creating the possibility of more US and UK bank failures if a run occurs on their Irish operations. As well, bank executives from Irish national banks apparently went on BBC Radio 4 joking that British citizens should deposit their money into Irish banks.

Because, while this Irish deposit insurance apparently does not cover deposits held by Irish citizens in non-Irish banks in Ireland, it does apparently cover the deposits of non-Irish citizens held in Irish banks outside of Ireland. The British insurance scheme only covers the first £35,000 (roughly $70,000). Which means that the Irish just created a huge incentive for all British citizens holding accounts in excess of that to transfer their funds to Irish banks. That seems like a good way to start an economic war.

One possible exception to the "Irish only" rule may be Ulster Bank, a bank domiciled in Belfast but operating on an all Ireland basis. Brian Lenihan, Irish Finance minister, explained why only Irish banks were being covered:

Mr Lenihan emphasised that the Government had responsibility for the six domestic financial institutions, but other financial institutions owned by companies outside the State were the responsibility of other sovereign states.

And as for the economic distortion that this promises?

The guaranteed banks received inflows of deposits from the UK, with one Irish bank receiving a single corporate deposit of €500 million after the guarantee was announced.

This is direct assault by the Irish on the financial primacy of the City of London, and it's only a matter of time before the boys on Wall Street find their Irish roots.

The irony (one of the) of this situation is that this whole move may have been precipitated by a potential takeover for the Bank of Ireland by Spain based Santander bank.

Now though the bug has spread, and European nations are acting to make guarantees similar to that made in Ireland to prevent deposit outflows to Ireland. There appear to be two schools of thinking on this.

1) Follow the Irish

If the French follow the Irish, as they are believed to be considering, bankers said it would inevitably force all governments across Europe to follow suit. Depositors would then have to decide which sovereign guarantee was safest. Credit default swaps, effectively the cost of insurance against going bust, on Ireland's government bonds almost doubled yesterday after the announcement, indicating the level of risk transfer.

That article also notes that the European regulators have opened an anti-competition case against the Irish.

2) Spain is acting to pressure unified European level action to harmonize deposit guarantees.

Spain today joined the call for an increase in the guarantee limit on bank deposits across Europe, piling further pressure on UK Prime Minister Gordon Brown to support an ambitious plan for a €300 billion (£237 billion) bailout fund to rescue crippled banks.

The Spanish Treasury indicated today that it would support an EU move to lift guaranteed savings, but would not act unilaterally and copy Ireland's move to only guarantee domestic banks.

Again, Spain's Santander was heavily involved in supporting UK banks during their problems, and this declaration from the Spanish government is being interpreted as Spanish pressure on the Brits to join a European bailout scheme.

It's going to matter a great deal which side wins, because if the Spanish win, then the potential for crossborder mayhem is minimal. But if other European countries follow the Irish, there is going to be the potential that this could trigger multiple bank failures as money chases bank guarantees across national borders.

And this danger includes US corporate deposits. So we could see runs on any number of banks that either have exposure in Europe, or have corporate accounts that can be shifted abroad.

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Comments

Sorry Bob

didn't mean to double post to Instapopulist.

This situation could be very, very bad.

I wonder if Defazio and the gang on the Hill have been appraised of the situation. The Bank or Ireland has US operations.

Something like a Tobin tax of 5-10% on cash transfers to foreign domiciled banks would tame the tiger. Matathir in Malaysia used a similiar measure to prevent capital flight during the Asian Economic crisis.

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no problemo

remember there is the "help me I've fallen and can't get up" admin topic for these things. ;)

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Perhaps instead of fighting it

We need to have all 50 states pass their own deposit insurance for banks operating entirely in-state.

Wall Street has dominated the United States too long- a bunch of unelected dictators. If this "Irish solution" works, then a similar one can rescue individual states that don't want to follow Wall Street down the rabbit hole.

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Maximum jobs, not maximum profits.

Until very recently

banks had to be state chartered, and there were limited interstate banks. But after the 1980s you had those walls fall down, and groups like Chase swallow up huge numbers of banks. So now the collapses are all the more dramatic.

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no kidding

Who feels like this is a huge smoke screen to get the "Standard Oil" of banks....namely Goldman Sachs?

I feel like I'm in a PBS documentary tabulating the carnage from the 1880's Robber Barron era.

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Sounds like we need to return to another 19th century tradition

Get a few hundred vigilantes together, armed with revolvers, storm Goldman Sachs and take our taxes back.

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Maximum jobs, not maximum profits.

uh

Ludlow Massacre and many stories like this is what happened in the 19th century.

Do me a favor and don't even hint at advocating violence on this site...I know people are frustrated but that is not where I want at least this site to go to.

If anybody, think of Gandhi if you want to talk about the public rising up.

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interesting

Well, seems Ireland has upped the ante and all other countries should simply follow suit?

There is a clause in the Senate bail out bill to reduce (holiday? - haven't found this one yet) taxes on capital repatriated back into the US. Many corporations play global tax games and manipulate local economies, tax policies and keep a lot of capital offshore as a result.

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IMF warning

US headed for "deep" recession.

Here's what kills me, they are all saying the credit market is frozen....but ya know wiping out the middle class, bleeding them dry, putting together mortgages with hidden balloon payments, credit cards that suddenly jump to 30% interest rates....

I mean they have bleed the world dry and are now after the taxpayer revenues.

Bummer they squeezed all of the money from the middle class...but of course now there is a credit crisis because they wiped out their customers.

It doesn't take a rocket scientist to figure this out.

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Greece Guarantees All Deposits

Greece Guarantees All Deposits

Looks like they might all have to follow suit...

except the US of course (sic).

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Fortis Nationalized

The Dutch just nationalized Fortis. Meanwhile Krugman predicts "bail out version 2.0" will be here before January.

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Eurodollars

Hrmm...going to have to watch Eurodollars contracts then. For the uninitiated, Eurodollars aren't the Eurozone currency known as the "Euro," but US dollar deposits in foreign (read mainly European) bank accounts. The futures contract is a benchmark rate that many work off of, similar to LIBOR.
http://www.cmegroup.com/trading/interest-rates/stir/eurodollar_FO.html

This could also backfire on the Irish. They are also coming off of a housing slump. Secondly, the heady days of being the "Celtic Tiger" are now over. Their move has obviously burned a lot of financiers. When the economy turns, and it will, they may find it harder to allocate foreign investment. Irish banks may gain from this, and this may help them expand beyond their borders in the long term. But when they do, they will be met with fierce resistance by those financial institutions that got burned by this.

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global capital

We could use an in depth blog post on global capital and how some nations are setting up protections for just their citizens and corporations while others (such as the U.S.) just gave $700B which foreign banks can get.

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