Ireland made a €400bn gamble yesterday with its decision to fully guarantee the deposits and debts of six local banks.
That’s almost €92,000 for every man, woman and child, according to a Collins Stewart note out today:
On the plus side, if it works, that cost will be somewhat mitigated as deposits flow into the Irish banks. To further lower the expense, the Irish government says it will charge the banks a fee for the guarantee.
That’s where the plan becomes problematic, according to Collins Stewart.
The market cost of the guarantee, based on the banks’ CDS spreads, will be something like this:
That’s high enough to have wiped out bank profits at almost any point in 2008, Collins Stewart says.
Still, Ireland’s move has certainly upped the stakes in the confidence game that is banking. And unlike the US and UK, it’s going all in on a brave bluff.
From Collins Stewart:
Having effectively bet the economy (rather than dithering with halfway solutions as per the UK and US governments) this system does have a good chance of stabilising the Irish banks
And the US and UK appear to be taking note. The US government is discussing raising the level of FDIC protection above the current $100,000 while Gordon Brown is coming under pressure to extend the government’s guarantee over £35,000.
FT Alphaville wishes them well playing bank protection Poker.