Last autumn representatives of the main financial institutions went cap in hand to Merrion Street and announced that they were in some serious trouble and something really must be done.  From the outset the government would seem to have been in an incredibly strong negotiating position.  So what did they do?  They pledged to guarantee the deposits and the assets of these institutions.  They then rushed legislation through the Dáil to effect this guarantee and then they sat down to negotiate the terms of a guarantee which they were legally obliged to provide.  Wouldn’t you just love to play poker with these guys?  I can just see Biffo announcing to the guys sitting around the green baize, ‘I’ve got four aces here, lads.  So I’m putting everything I have on the table.  Anyone going to see me, then?’

Tomorrow Brian Lenihan will announce details of how €7 billion of Irish state money is to be applied to save the two largest financial institutions in Ireland, AIB and Bank of Ireland.  The negotiation of the terms of this cash injection have been going on for quite some time and it would seem, from reports which have been filtering out, and from the general demeanor of Lenihan and co, that the government has been on the back foot for most of the engagement.

Now, I’ve said before that I am not an economist, but the situation would seem to be pretty straightforward.  One scenario is that the two banks are in serious trouble and are desperately in need of a massive injection of new capital to allow them to stay in business.  In this case the banks don’t have a leg to stand on and have to accept whatever terms the government cares to dictate.  Another scenario is that the banks are actually reasonably healthy and are not, in fact, in any danger of collapse.  In this case the government can then simply take our €7 billion and do something useful with it.  The recapitalisation of AIB and Bank of Ireland is supposed to encourage the banks to start lending money to small business again, therefore safeguarding jobs in smaller firms which are experiencing cash flow problems.  If the banks don’t want to do things our way then there is another bank which could be used to channel this cash to the SMEs.  Anglo Irish Bank is wholly owned by the state and could be transformed into a kind of latter day ACC to offer credit to businesses which are otherwise sound but are suffering through a lack of cash at certain times.  As I said, I’m not an economist, so I can’t say with certainty that this transformation of Anglo Irish Bank is possible.  However, if it is not, why not just build a new ACC type vehicle to restart the flow of credit to small business.

Now, as you can see, the government has held all the aces from the very start in this sorry mess.  The fact that doing a deal with the banks has been so difficult can only lead me to one of two conclusions.  The first is that the government and those negotiating on their behalf are complete idiots who are being led a merry dance by Messrs Goggins and Sheehy and their doubtless large and expensive team of financial and legal eagles. This is a rather worrying thought since Cowen and Lenihan and Coughlan and their mates are actually supposed to be running the country.

The second conclusion is that the government is determined to give this €7 billion to these bankers at all costs.  That no matter how difficult the negotiations, no matter how tough a bargain the banks drive, the government has no other strategy but to recapitalise.  That the government has a default position that AIB and Bank of Ireland will be part of the solution no matter what the price.  Why would this be so?  Is it a kind of loyalty to fellow members of the golden circle?  Is it to prevent the banks from calling in their tabs with Fianna Fáil’s best mates in the building industry?  Why does this Fianna Fáil led government seem so determined to roll over and have their bellies tickled by AIB and Bank of Ireland?  Are they completely incompetent or completely corrupt?

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