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Financial Crisis: Everything You Need To Know...

Financial crisis...the main issues behind the government's decision to guarantee bank deposits...


Q: Why did the Government guarantee bank deposits?
A: It had no choice. After yesterday's collapse in bank shares and the rejection of the Paulson bank bailout plan in the United States, the Government had to move.

With Irish banks paying a huge premium to borrow money from foreign banks our entire financial system had come within a few hours of completely seizing up.

Q: How safe are my savings?
A: After this morning's move, the savings of bank depositors are now 100pc state-guaranteed.
This means that savers who have money deposited with the six Irish banks -- AIB, Bank of Ireland, Irish Life & Permanent, Anglo Irish, EBS and Irish Nationwide -- can sleep easily in their beds at night.

Q: Which banks aren't covered by the guarantee?
A: None of the foreign-owned banks are covered by the guarantee. These include Ulster Bank, NIB, First Active, Bank of Scotland, Halifax and IIB Bank.

Q: Is there anything I should be doing?
A: If you have money deposited with one of the foreign banks operating in Ireland, it might now be a good idea to switch it to one of the Irish banks covered by the State guarantee.

Q: What are the chances of an Irish bank going under?
A: By guaranteeing their deposits and wholesale funding, the Government has ensured that an Irish bank won't go bust. But this morning's move does no more than buy time for the embattled Irish banking system.

The fundamental problem, one of massive over-lending to a property sector where values have fallen by at least a fifth, remains unchanged.

There will have to be a major restructuring of the Irish banking system before the Government guarantee expires in two years' time.

Q: Are the Irish banks now vulnerable to takeover?
A: Almost certainly yes. While the Government will do everything in its power to maintain the independence of AIB and Bank of Ireland, it is a different story for the smaller Irish banks.

By the time the guarantee expires in September 2010, most if not all of these will have found new owners.

Q: How exposed is the Irish taxpayer by the guarantee?
A: Massively. The Government has now unconditionally guaranteed over €380bn of bank depo-sits and inter-bank borrowing. That's more than twice the value of our total economic output.


If the Government has to pay out even a tenth of the amount which it has guaranteed, the national debt would double.

Even more worrying is the fact that the Government hasn't disclosed the terms and conditions on which it is providing this guarantee to the banks.

Q: What does the guarantee mean for next month's budget?
A: Brian Lenihan has now underwritten almost €400bn of bank deposits and inter-bank borrowing. That's over six times the amount of money the Government will spend this year. The guarantee makes nonsense of the pre-Budget arithmetic.

Q: What does the guarantee mean for bank shareholders?
A: Irish bank shares soared on the announcement of the guarantee. This is good news for anyone who is a member of a company pension scheme or has a private pension plan, as bank shares make up a large proportion of most pension funds.

Q: When will this instability end?
A: Not any time soon.
Until the Paulson package is finally passed by Congress this crisis is going to get worse not better.


Dan White - Evening Herald

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