Some 10 months after the government agreed to guarantee the liabilities of the seven Irish banks (a contingent liability which came to €485bn), it is still difficult to absorb the implications, both financial and in terms of commercial fairness.
While accepting that the guarantee will presumably never be called upon, the scale of the liabilities accumulated by Irish banks during the boom years are truly extraordinary.
If you regard the guarantee scheme as a 'bailout', it is a staggeringly large bailout. For example, the total liabilities guaranteed last September are larger than the entire cost of the Marshall Plan, the Louisiana Purchase or the Korean War, when adjusted for inflation. The liabilities built up by the Irish banks almost equal the entire cost of the Vietnam War.
Those who designed the scheme no doubt realise the scale of the liabilities involved, but they will tell you it is essentially a clever ruse. It gives comfort to bondholders and depositors, allowing Irish banks to retain access to precious risk capital. At the same time, everyone ultimately knows the guarantee will never be called in, so who is worried?
If the practical implications of the guarantee are rather limited, is there any reason to be concerned at all about what was agreed to by government in September? Yes. The implications that taxpayers, the market and even bankers need to be worried about is what it means for normal commercial life in Ireland and across the eurozone.
The problem is 'moral hazard'. This means that companies and individuals will take unnecessary and dangerous risks because they know they are protected or insulated from the ultimate results of their actions. Put simply, if you know the government is going to rescue your institution no matter what, your own aversion to risk is likely to be lessened significantly.
The decision last year by European governments, including Ireland, to guarantee and then re-capitalise a host of banks put the moral-hazard issue at the top of the agenda among regulators and among that small group of crackpots who still believe that capitalism should actually operate in well... a capitalist fashion.
New proposals from European Commissioner for Competition Neelie Kroes released last week were meant to deal with this issue. Kroes, known by admirers and critics alike as 'Steelie Neelie', wants to make sure state-aid rules in the financial services area do not distort the market and do not cause moral hazard. She also wants to ensure that banks which have guarantees and/or state recapitalisations do not have an advantage conferred upon them by receiving state aid when compared with their rivals who have not received any largesse.
Based on a document circulated last week by the European Commission, moral hazard, distortions and unfair advantages are to be tolerated across European banking for several years, rather than dispensed with. While the European Commission tries to glibly claim that it's simply tinkering with existing state-aid rules for banks, it is actually diluting them significantly, not tinkering.
The document circulated by Kroes's office last week spoke about the "need to modulate past practice in the light of the nature and the global scale of the present financial crisis". Modulate seems to be more about watering down existing state-aid provisions.
Media coverage last week pointed out that European governments will now have to submit restructuring plans for each bank receiving state aid and each bank will have to be stress-tested. There will also have to be some asset sales and burden-sharing when banks get into trouble. Burden-sharing is presumed to mean that shareholders and debt-holders will have to absorb a portion of the losses along with the taxpayer.
But the Kroes document immediately gives the banks an out from this provision by saying that if "market circumstances" don't allow such burden-sharing, it can simply be addressed at an undefined "later stage".
Even banks which have not received state assistance are not to be fully protected under the Kroes proposals from the distortions that such interventions cause. For example, the document says that while governments need to limit distortions, the other non-assisted banks need to realise that "the current crisis has required very widespread state intervention in the sector".
The good news does not end there for banks, which have received state assistance and who want to remain as zombie banks for a few more years. The document says that while it would be desirable that restructuring of rescued banks should be "as short as possible", the European Commission will permit longer time horizons than is usually the case. The document says nothing about either the stress tests or the restructuring plans being published.
Oddly, while offering up very little in the way of a solution to the moral hazard dilemma, the Kroes proposals do diagnose the problem very well. "The company and its capital holders should contribute to the restructuring as much as possible with their own resources. This is necessary to ensure that rescued banks bear adequate responsibility for the consequences of their past behaviour and to create appropriate incentives for their future behaviour."
In a surreal argument, the document tells member states not to provide restructuring aid that might lead to "market-distorting activities" not linked to the restructuring itself. But, of course, a state guarantee is of itself a market-distorting activity. A state re-capitalisation of an insolvent bank is of itself a market-distorting activity, at least from the point of view of a competitor, which would stand to benefit from the collapse of the rescued bank.
The Kroes document tries to hang tough when talking about burden-sharing. In other words, investors in AIB, Bank of Ireland or Irish Life & Permanent should have to share the pain of the losses along with the government. But just when you think the document has discovered a spine, it skirts around the controversial terrain.
For example, it sets down no guidance or instruction to member states over what kind of burden-sharing should be engaged in. Setting out fixed numbers of the scale of burden-sharing is "not appropriate in the context of the present systemic crisis", the document states. All that matters is that the banks in question are returned to what the European Commission calls "viability", which it helpfully tells readers is a position where the bank can cover its costs.
The document does come close to calling into question some of the bailouts which have been engaged in by member states. For example, it does question state intervention in banks based on their size and "relative importance". One wonders whether Irish Nationwide, for example, would pass muster under this heading?
But time and time again the document avoids being prescriptive. It broadly gives members states huge licence to continue propping up ailing or obsolete banks, while disadvantaging those not receiving state aid and those trying to enter the European banking market for the first time. The few sparse requirements placed upon governments (viability reports and stress tests) do not even come with a requirement that the results be published or in any way or laid before investors, like they have been in the US.
Despite a procession of blood-curdling headlines last week about her intentions to put regulatory manners on the banks, Kroes is frightening nobody with her meek and tepid proposals.