Wednesday, October 01, 2008
Ireland Bank Guarantee
Ireland has now guaranteed all bank deposits for the next two years, at least for the six largest firms. The Economist's take on it is here.
The idea, of course, is to lend credence to their viability in the short term; but who's to decide when to ease off the guarantee (if that's even ultimately the goal)? Presumably, if we get a slew of country guaranteeing deposits, then we've created enough happy spirits in the credit market so people aren't spooked anymore. But if that's to be true-- that the guarantee makes things better-- then which country is the first to jump ship and go back to an un-guaranteed marketplace, be it 6 months, twelve months, two years, whatever?
Would there be a collective action of all countries dropping at the same time so as not to gain a temporary advantage (again, under the assumption that it helps)? And if THAT could be arranged, what kind of shock to the system would it be if ALL countries dropped at once? What would that due to confidence? Will they be able to get away from this action?
Ratchet effect, indeed.