The same news has been picked up by Ambrose Evans-Pritchard who reports that the guarantee was given "after panic withdrawals by customers in Athens and Thessaloniki." This, he writes, is creating an unstoppable stampede across Europe for an EU-wide bail-out of the financial system.
So it is that the dominoes are beginning to fall, the proximate cause being the massive liquidity crisis in the banking system, exacerbated by the inflexible banking rules held in place by EU directives.
What is only now emerging, however, is the dire straits in which the Irish banking system had found itself in, with The Times reporting that, before the Irish government had given its guarantee, one bank, Anglo Irish, had seen its shares plummet by 46 percent.
There had been rumours of large depositors demanding their money, including one German customer wanting an immediate €1.5billion. Then came the "horrendous news" that Congress had rejected the US bailout plan.
According to The Times, the "shaken Irish bankers" were grave as they poured out their story to the Taoiseach, Brian Cowen, and the Finance Minister, Brian Lenihan. Liquidity was drying up, they said, other banks were refusing to lend to them except for the shortest periods. According to one source: "They basically said, 'Look, tomorrow two of our banks won't survive'."
So it was that the Irish government decided to drive a coach and horses through EU law, leaving the EU commission with an impossible dilemma. It should, of course, have upheld its own law and issued a stern rebuke to the Irish government, telling it to get back into line. But, if it had, it would have presided over the collapse of the Irish banking system.
In the event, it decided to do nothing, influenced undoubtedly by the looming prospect of a second referendum on the
The Irish action, as intended, had the effect of sucking in funds to Irish banks, thus overcoming the regulatory logjam created by the Basel II rules, as implemented by the EU directives. But the cost has been transferring stresses to elsewhere in the system, with British banks haemorrhaging funds.
As importantly, in backing off from confronting the Irish government, the commission ceded its own moral authority and set the scene for the copy-cat Greeks taking action to save their own basket-case economy.
Writes Ambrose, Greece has so far escaped attention as the financial storm breaks over Europe, but the economy is deeply unbalanced. A torrid credit boom has been allowed to run unchecked, leading to a current account deficit of 15 percent of GDP - the highest in the eurozone. While property losses are modest so far, the Greek banks have run into trouble rolling over short-term debts after the near total closure of Europe's capital markets. The liabilities of the Greek banks are roughly €320 billion.
Something had to be done.
As to the consequences, Ambrose cites Hans Redeker, currency chief at BNP Paribas. He says that, "The whole of Europe will have to do same thing, otherwise Europe will have a split banking system." The Greek move, he writes, puts fresh pressure, in particular, on Germany to back the mounting calls for an EU lifeboat fund to shore up Europe's struggling banks – floated by Sarkozy earlier yesterday but since denied.
Berlin fears that any such fund is a Trojan Horse that could ultimately leave German taxpayers footing the bill for a massive bail-out of southern Europe as the region's booms turn to bust. Key ministers are now frantically trying to stop the idea gaining a serious head of steam.
With those ministers – including Gordon Brown - meeting with Sarkozy this weekend, fresh impetus has been added to the talks. Irrespective of the outcome of the House vote in Washington, the European banking system could melt down as national systems compete with each other for funds to resolve their own liquidity problems.
In what is fast becoming a high-octane game of musical chairs, the last country left standing when the music stops goes bankrupt, creating irresistible pressure for a "European solution".
This is articulated by Angel Gurria, head of the OECD club of rich nations, as cited by Ambrose. She says that Europe may not have the luxury of trying "piecemeal" responses as the financial storm turns violent. "Considering the exposure of European financial institutions, we might have to start thinking of a systemic plan for Europe if things don't improve on the other side of the Atlantic," she said.
Thus, having been a party to the regulatory disaster which has blighted the banking system and prevented its recovery, and then having refused to enforce its own laws, we are now coming to a perverse situation where a problem partly of the commission's making is developing into the classic "beneficial crisis" from which the commission itself will be the prime beneficiary.
The stakes for which the commission is playing, though, are incredibly high. While the glittering prize is a huge leap forwards in European political integration, the downside risk is the collapse of the euro, and the EU with it – as Ambrose pointed out yesterday.
Allowing the Irish action, however, may prove to be the fatal miscalculation. As individual member states follow its lead and adopt a sauve qui peut strategy, the commission might find that, by the time it is able to take action, the rot has gone too far and there is nothing left but rubble.