Irish banks traditionally funded business and customer loans from retail customer bank deposits which are extremely stable. But in the Celtic Tiger property boom,they turned to the international wholesale market to raise money to meet the rocketing demand for property loans. As a result,the banking system became very dependant on access to wholesale credit. So when the banks were unable to raise wholesale loans after the Lehman Bros collapse panicked credit markets,a collapse of the Irish banking system threatened. In response,the government blanket guaranteed billions in Irish bank debts to October 2010 to keep the credit flowing. But was there a viable alternative,apart from the traditional one of bank nationalisation?

In my opinion, the government could have kept the wholesale market open by offering limited government guarantee on incremental new debt issues of banks,which guarantees could amount to a fraction of the existing blanket guarantee on all debt,past and future. The limited guarantee could roughly be matched to the incremental demand for credit which has dropped in the recession. Funds raised under the guarantee could be ringfenced from previous debt to prevent the banks from raising money under the guarantee to repay their existing debts. With default on existing debts,the banks would go into administration,but the limited guarantee would enable their credit operations to function as a going concern. Eventually,the banks would be sold off to new owners,probably foreign,with the bondholders receiving cents on the euro or converting their bonds into new shares.