The Irish solution is not the answer to this crisis

IT simply will not wash. The Irish government's blanket 420bn guarantee of all deposits and a large slice of debt in its six main domestic banks and building societies for the next two years is being portrayed, in some quarters, as proof that small, independent European nations can act decisively to protect their banks from the ravages of even the fiercest of global financial gales. Alex Salmond and the SNP's Treasury spokesman at Westminister, Stewart Hosie, long-time admirers of the Celtic Tiger across the Irish Sea, have publicly urged London to follow Dublin's lead.

Conspiracy-minded Nationalists here who subscribe to the theory that Gordon Brown personally drove HBOS - or rather the 313-year-old Bank of Scotland arm of HBOS - into the arms of Lloyds TSB to subvert Scotland's economic case for independence, are already crafting a narrative which demands: if Taoiseach Brian Cowan can do it, why can't we? Their answer? We could have saved Bank of Scotland, if only we had Dublin's financial firepower.

It will not wash, for the simple reason that this mother and father of all financial meltdowns has already demonstrated that politicians and policy-makers, in countries large and small, are not remotely in command of events. Look at this week's events on Capitol Hill, if you doubt me. They are making it up as they go along. And, in Ireland's case, their emergency solution is creating as many problems as it may have solved, as the scale of the guarantee destabilises deposit flows into banks in neighbouring jurisdictions and adds to overall turbulence.

Let's be clear about what prompted Mr Cowan and his Finance Minister, Brian Lenihan, to agree to such a dramatic and potentially-costly intervention late on Monday evening. If they hadn't intervened, at least one of Ireland's deeply troubled banks - Anglo Irish is the one on most lips - would have gone to the wall. The stability of their system was at severe risk, thanks to years of reckless lending to property developers and a hugely inflated housing market.

Morgan Kelly, professor of economics at University College Dublin, puts the amount owed to Irish banks by builders and developers at a colossal 110bn. "Of every 100 that Irish residents have deposited in banks," he wrote, in yesterday's Irish Times, "60 has been lent for property speculation." Given the stretches of vacant, unsold houses and flats now littering the Irish landscape, billions of euros in those outstanding loans will never be recovered. Professor Kelly warns of a battle of wits to come between banks and the financial regulator "as banks try to offload bad debts on to the taxpayer and the regulator tries to stop them".

The guarantee, passed by the Dail and the Seanad in the wee small hours of yesterday morning, may have rescued, for now, what Mr Lenihan has called Ireland's "orphans of the storm". But in a globalised world where banking stability is no respecter of national boundaries, it risks saving one set of banking orphans by creating others elsewhere. Little wonder there is such concern, notably in the UK, in Brussels and in Paris, that the government in Dublin paid such little heed to the consequences of its actions. It is making some amends, notably by moving to include RBS-owned Ulster Bank within the terms of its guarantee. But national self-interest is not going to address the central challenges thrown up by this crisis.

Nor will it necessarily serve Ireland's self-interest. The full guarantee amounts to more than twice the country's GDP. If even a small fraction of that has to be coughed up by government in due course, Ireland's already-strained public finances will be even further stretched, right in the middle of a deepening recession. Tax- payers would be left to pick up a very painful tab. And there are growing signs they don't like it. One Green Party TD admitted he had voted for the guarantee through "gritted teeth" because of a "lot of scum who do not deserve to be bailed out in this way".

Suppose Scotland was already independent and Alex Salmond was Prime, not First, Minister. Another small sovereign country has seen one of its leading banks, HBOS, take a hammering not unlike that meted out to some of its Irish peers. No, not the work of spivs and speculators. HBOS shares have been under extreme pressure even since short-selling was temporarily suspended. Its spokesman has admitted publicly that it lacked liquidity. Had its board not agreed to be taken over by Lloyds and the UK government agreed to waive competition rules, it might even have become a third candidate bank in the UK for nationalisation. Markets know that.

However, if an independent Scotland had confronted this same crisis, and Prime Minister Salmond had followed his own advice and implemented a guarantee over bank deposits and debt, he would be saddling Scottish taxpayers with a much, much bigger risk. Scotland is the registered office of not just HBOS but the Royal Bank of Scotland group, in more normal times the world's fifth largest bank. Then there's Clydesdale and the Scottish operations of other banks like Lloyds TSB. The exposure wouldn't just be twice Scottish GDP. It would be at least an order of magnitude greater than that.

Even if Alex Salmond got such a measure through an independent Scottish Parliament, one wonders whether it would be worth the paper it was written on. Another of the small independent countries on the First Minister's cherished arc of prosperity, Iceland, has just had to bail-out its third biggest bank, Glitnir. Such is the strain of that more-modest rescue on Iceland's public finances that Standard & Poors this week downgraded Iceland's sovereign debt.

I don't doubt that, if politicians and policy-makers are to get back on the front foot, they must do whatever it takes to stabilise financial markets and get banks lending to each other again. That means the US Congress finally passing the Bush administration's "bad bank" plan to quarantine the most toxic assets there. It means central banks continuing to pump liquidity into the system. It means more co-ordinated international action on depositor protection and how failing banks should be dealt with. And it means monetary authorities coming to their senses, especially here and in the euro zone, and cutting interest rates, even if only for the symbolic message that sends.

But when stability is eventually restored, the challenge will be to hammer out a system of international banking supervision and regulation which actually works. Delivering that is not in the gift of any national government, however big or small.