Some view Ireland’s bank guarantee as devious

updated 5:17 p.m. ET Oct. 1, 2008

DUBLIN, Ireland - Ireland's bold decision to guarantee every penny of deposits at Irish-owned banks looks to some like a psychological masterstroke in the banking crisis — an emergency measure that could force countries across Europe and beyond to follow suit.

But European 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' maximum 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 calamitous falls Monday.

That Irish blank check for deposits and interbank loans amounts, in a doomsday scenario, 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 government leaders themselves have stressed that they made the unprecedented promise only because they calculated that by doing it, shares would rebound, foreign capital would flow in, and they would never have to spend a cent of taxpayer's 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."

Some bank customers in London said Wednesday that faith in the banking system is fading and politicians' reassurances ring hollow.

"There's no panic now, but there might be if one of the major banks fail," said David Hickman, 62, leaving a branch of NatWest bank. "Then I think we'll have a serious problem."

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.

He said that Irish banks had been struggling to attract capital from foreign banks. The key part of the Irish guarantee, he said, was its promise to foreign wholesale lenders that their money deposited in Dublin would be refunded if any Irish bank failed.

"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.

Ireland raised its minimum five-fold to $140,000 last month in an initial, failed attempt to stop speculators' assault on Irish bank stocks.

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