Ireland's Bonus Ban: A Lesson in Contract Law

Strategic Insights -

In a move that has raised eyebrows from British taxpayers, Ireland's Allied Irish Banks (AIB) has been ordered to withhold €40m of bonuses due to its 2,500 staff. The decision has prompted questions about why Ireland's government can override the bank's contractual obligations, while the UK government cannot. However, the answer lies in the stark reality of Ireland's economic predicament, which has left the country's finances in a precarious state. The government's threat to withhold further funding to AIB was little more than a desperate attempt to salvage the country's banking sector, which is now largely under state control.

Key Takeaways:

  • Ireland's finance minister, Brian Lenihan, was forced to take a desperate action by withdrawing €40m of bonuses from AIB's staff due to the country's severe economic predicament.
  • The Irish government's blanket guarantee of most bank debt has led to state control of large parts of the domestic banking sector, with recapitalisation potentially taking the government's stake to 90%.
  • Lenihan's threat to withhold further funding was a hollow one, as state support for the banks is baked into the terms of Ireland's "rescue" plan.
  • In contrast to Ireland's situation, British chancellor Alistair Darling took a more flexible line with Royal Bank of Scotland (RBS) in 2009, allowing the bank to pay deferred awards in subordinated debt subject to clawback.
  • The Irish government's retrospective action could erode contract certainty and repel talent, just when Irish banks need it.
  • Darling's approach was a creative and commonsense solution that avoided trampling over contract law, whereas Lenihan had no such choice.
  • Ireland's attractions as a global financial centre have been squandered, and the government's action may have negative consequences for the country's economic prospects.

Statistics:

  • €40m: the amount of bonuses withheld by AIB due to Ireland's government order.
  • 2,500: the number of staff affected by the decision.
  • 90%: the potential stake the government may take in AIB following recapitalisation.
  • 2009: the year in which RBS was 70% state-owned.
  • 70%: the percentage of RBS that was state-owned in 2009.

Sources:

  • FT: "AIB's broken trust" by Andrew Hill, 7 Dec 2009.
  • FT: "State support for banks is baked in" by Dan McCrum, 7 Oct 2010.