The Government was warned of the potential cost of a blanket guarantee to the six main banks the day before it was introduced.
Documents published by the Dáil Public Accounts Committee show that international consultants Merrill Lynch warned the Government that the guarantee could cost up to €500 billion, which the State could not afford to cover if required
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An e-mail from Merrill Lynch on September 29 recommended an alternative to the guarantee called a 'Secured Lending Scheme' for the banks, under which commercial property could be exchanged for Government bonds or cash.
A Government spokesman insisted that it was incorrect to say the Government was advised not to guarantee the six banks. He said Merrill Lynch set out the pros and cons of a number of options, but had not recommended which option should be pursued.
A Department of Finance source accepted that Merrill Lynch had raised concerns about a blanket guarantee and its potential scale, and that the guarantee was its least favoured option. But he said Merrill Lynch did not recommend any particular course of action, and had highlighted the difficulties of all the other approaches as well.
Merrill Lynch said a blanket guarantee would ‘almost certainly negatively impact the State's sovereign credit rating and raise issues as to its credibility’.
It added that the wider markets would be aware that Ireland could not afford to cover the full amount if required.
However, the e-mail also states that ‘there is no right or wrong answer’ to the problem facing the Government.
Today, Taoiseach Brian Cowen insisted that the bank guarantee decision was the right one, and he stood over it.
He said Merrill Lynch had put forward a range of options, and the Government had to choose the best one. Mr Cowen said there had been 'wishful thinking' of the part of the banks.
Merrill Lynch's report also claimed that apart from liquidity concerns, ‘all of the Irish banks are profitable and well capitalised’, but warned that liquity for some could run out in days rather than weeks.
The PAC is to call senior officials from the Department of Finance before it next Thursday to discuss the issue.
Government advised on Anglo liquidity
Elsewhere in the documents, the Government was advised just prior to its introduction of the banking guarantee in September 2008 that Anglo Irish Bank was rapidly approaching the point where it had exhausted all possible sources of liquidity available to it.
In an advisory document prepared on September 28, the day before the guarantee was introduced; advisors Merrill Lynch said that Anglo management was projecting a funding deficit of €100m by September 30, growing to €4.9 billion by October 24.
The report looked just at the liquidity and strategic options for Anglo Irish, Irish Nationwide Building Society and Irish Life and Permanent and was based on conversations with the three institutions. It found that all Irish banks were profitable and well capitalised, but liquidity for some could run out in days rather than weeks.
It found only 3% of Anglo's loan book was currently regarded as impaired by its management, but falling property prices would likely impact their book.
It estimated that in a worst case stress test scenario, ordinary shareholders and those holding the lower category subordinated debt would lose €7.5 billion.
It said the main need for Anglo was a pressing need for liquidity as a result of a sustained outflow of corporate deposits and overnight funding being unavailable to banks of their credit rating.
On Friday, September 26, it said, Anglo had formally requested a short term liquidity advance of €1.7 billion from the Central Bank for the end of the month.
The report said Irish Nationwide's commercial loan book was regarded as being generally good but there were concerns over the influence of the chief executive.
Based on its own projections, the report says, INBS had sufficient liquidity to meet needs for one to two months and in an extreme stress test scenario, most of its reserves of €1.8 billion would be depleted.
On, Irish Life and Permanent, the report said the asset quality was good but the institution relied heavily on wholesale funding and was approaching the limit of its eligible collateral at ECB.
A note of a meeting involving Goldman Sachs, the Department of Finance, Central Bank and Financial Regulator on September 21 contains a view from the management of Irish Nationwide that losses from its property loans would amount to 'a few hundred million euro'.
After examining INBS's top 30 Irish and UK loans, the note referred to 'reassurance' that there was 'real value there'. It said the society's auditors did not see its loans performance being 'worse than anywhere else'.
But the note also warned that Irish Nationwide needed help from the authorities 'soon', and was in danger of running out of funds in 11 days.
It suggested a range of options for discussion, including nationalisation or the break-up of the society.
