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The cost of the banking guarantee
Read more about: Economy 
Previously posted at Granite Shavings.
The Government says that the amount involved being guaranteed is €400bn. The current standard rate for interbank credit default swap insurance for the Irish banks ranges from 2% to 3.2% (as of last April). So, this guarantee is worth at least €8bn per annum to the Irish banks (or a maximum of €12.8bn).
The four listed banks could all have been purchased outright on Monday afternoon for approximately €10bn*.
On top of that, the insurance certificate was issued without a premium even being discussed What kind of negotiating position is that? We still don’t know what the banks will be charged for this ‘insurance’, or even if they’ll be charged at all if they never claim.
Can I have that sort of cover on my car insurance, please? I promise I’ll start paying premiums when the car is totalled.
* Calculations as follows:
- AIB share price at COB Monday was €5, with 880m odd shares in existance = €4.46bn
- BOI share price at COB Monday was €3.40, with 1bn odd shares in existance = €3.4bn
- Anglo Irish Bank share price at COB Monday was €2.30, with around 800m shares in existance = €1.84bn
- Irish Life & Permanent share price at COB Monday was €3.72, with around 277m shares in existance = €1bn
- EBS & Irish Nationwide building societies aren’t listed, but it’s reasonable to put their values at around €1bn to €2bn each
All those prices are from the Irish Stock Exchange, and are the closing prices, not the lowest prices of the day.
Has Minister Lenihan issued a rebuttal?
Some quibbles:
1.I think you’ll find that no bank was paying the 2%/3% on anything but a very small proportion of its resources
2. Most shareholders would not have sold at last Monday’s prices, or anything like them
3. No “insurance certificate” has even now been issued, and it appears some banks are thinking of declining the cover (too late, I say, but we’ll see). The prospect of the cover was enough to do the job
4. The government have made clear from the start that there will be a charge, claim or no claim.