Remember that discredited term “too big to fail”? It has returned with a vengeance. The €85bn bail-out of Ireland being finalised in Brussels on Sunday is a bank rescue job. The Irish have been hurt not by the excessive borrowing, tax evasion or false national statistics that troubled the Greeks. What brought Ireland down were its banks; they have sunk the sovereign.
Irish bank assets became grotesquely out of line with the nation’s economy during the property bubble. It was in the belief that they were too big to fail that the government, in September 2008, offered a blanket guarantee to bank creditors. Some form of guarantee was essential; it is now clear that the one offered was excessively generous. Contingent liabilities have become actual liabilities. The country cannot afford to absorb these losses. Some €35bn of the
bail-out funding is likely to go to recapitalise and provide liquidity support for the banking system, on top of the taxpayer-funded financing it has already received.