Thursday, October 02, 2008

The elephant dives for cover

In a way, it is rather funny, although perhaps in equal measure pathetic, the way stories of great moment are paraded through much of the media with never a mention of that giant elephant looming in the undergrowth.

We refer, this time, to the great Irish Bank Saga, where that oh so communautaire Irish government has stepped in to give an unlimited guarantee to Irish savers – in breach of EU law, on at least two counts.

The law governing investor compensation is Directive 97/9/EC, known as the "Investment Compensation Schemes Directive".

This directive sets up an EU-wide minimum compensation requirement – currently €20,000 but no maximum. Member states are specifically permitted by the directive to set their own maxima, but subject to two conditions.

Firstly (see recital 15), the EU is concerned about "levels of cover higher than the harmonized minimum within the same territory," leading to "disparities in compensation and unequal conditions of competition between national investment firms and branches of firms from other Member States."

In order to counteract those disadvantages, therefore, those branches have to be "authorized to join their host countries' schemes so that they may offer their investors the same cover as is provided by the schemes of the countries in which they are located."

Secondly, the directive states quite clearly (recital 23), that the cost of financing such schemes must, in principle, be borne by investment firms themselves. Further, it states that the financing capacities of such schemes must be in proportion to their liabilities and then goes on to state that these schemes "must not, however, jeopardize the stability of the financial system of the Member State concerned."

Yet, reviewing the media coverage this morning, you would be hard put to find any reference to this law, much less any mention that the Irish government is in clear breach of it.

We thus get the Irish broadcaster RTE reporting that British banks have complained that the Irish legislation "would distort competition," while the British Bankers' Association is to deliver a letter to the [Irish] Government later today. From that source, and The Guardian we learn that British chancellor Alistair Darling has "approached [Irish] minister for finance Brian Lenihan on the legislation", saying that, "in no uncertain terms that the scheme was a problem for the UK."

And, of course, the BBC coverage is entirely devoid of reference to the elephant in the undergrowth.

However, it is the Irish Times which gives the game away. It reports that, "British Prime Minister Gordon Brown's office said Ireland's plan to guarantee all bank deposits will be studied by European Union regulators," citing Downing Street spokesman, Michael Ellam, saying: "Where there is a policy of one of the member states that impacts on single market rules, it is to be looked at by the European Commission."

But even Mr Ellam does not seem to have got the point. This is not [just] a matter of "a policy … that impacts on single market rules." The Irish move is in breach of specific provisions of an existing directive.

Bizarrely though, the elephant is keeping its head down. According to the IHT, EU competition commissioner Neelie Kroes "declined to criticize the Irish move outright," although she "noted that the Irish had failed to coordinate its move with other EU members."

All we thus get is the anodyne statement that, "Her office said it would investigate whether Ireland was guilty of unfair practices," and a little whimper from the corner. "I would like to plead to national governments," she says, "not to act unilaterally, but rather to continue their practice of consulting the (European) Commission when they are confronted with problems that may require state aid to the banking sector."

Then we get Ireland's own EU representative, financial services commissioner Charlie McCreevy, suggested that his colleague was being unrealistic. Governments like Ireland "don't have the luxury of waiting forever and a day to make up their minds about critical matters," says the former Irish financial minister.

It is almost as if the elephant, having dumped its pile of ordure in the room, is hastily retreating and denying responsibility for the mess. And, as usual, everyone is ignoring the smell.