THE GOVERNMENT has acted decisively to underpin the banking system. Its response is not perfect but, to date, appears to have worked and few can argue that it was not justified by the circumstances.
As officials and senior bankers met in Government Buildings on Monday night the situation was bleak. Irish bank shares were on the floor as the market scented blood. The choices facing them were stark: stand back and let events unfold, support the weakest banks in the hope that would suffice, or support all the banks.
The first amounted to little short of inviting a catastrophe; the second was deemed insufficient to deal with the problem; and the final emerged as the best option as the clock ticked down to the opening of European markets and the possible collapse of an Irish bank. Any agreement forged in such circumstances has its flaws and this is no different. The decision to leave foreign-owned Irish banks out of the safety net means that large retail banks such as Ulster Bank and National Irish Bank are at a disadvantage.
This aspect of the package is almost certain to be queried by Brussels, and that is presumably a bridge the Government will have to cross when it comes to it. But it presents a very serious problem for these banks and their customers. The Government should address the issue to minimise disruption.
Another glaring flaw in the package is the failure to tie down the price the banks will pay for the State's support. The Government's options seemed to be emerging more clearly in the Dail debate late last night. It would be foolish of the banks to act in bad faith on this matter given the scale of the risks that the Government has exposed tax payers to in order to safeguard them. And in time they must be held to account for their own role in creating this crisis.
While the Opposition and others are right to flag these matters they all fall into the category of issues that can be dealt with down the road. They will be of little consequence if the rescue package does not work.
The initial signs are encouraging: bank shares are recovering, but more significantly the Irish banks are gaining access to credit lines which had dried up as their international peers began to seriously doubt their ability to meet commitments. Equally encouraging is that Ireland has retained its AAA credit rating - the highest possible - despite effectively underwriting its banks.
This in part reflects the sophistication of the guarantee package which - if the Government is lucky - may never be called upon and thus cost tax payers next to nothing. In the event that guarantees are called upon, the State will take stakes in the banks.
Any optimism, however, must be tempered by the reality that global credit markets are in crisis, the Irish economy is in recession and the banks are all overexposed to the property market.
The Irish banking sector faces into a very tough couple of years as these problems are worked through the system.