Banks must cut reliance on state guarantees: EC

THE European Commission has warned that banks must wean themselves off state guarantees, saying it is crucial for economic recovery.

Throughout the EU, banks are reducing their reliance on state guarantees, which is a sign that they are gradually returning to market conditions, according to an EU report.

This is not the situation for Irish banks, however, that continue to be covered by state guarantees, and are likely to do so for at least another six months, while undergoing restructuring.

But they, and banks that continue to need the guarantees, are facing increased costs from July in an attempt to have them return to independence, or force them to restructure.

Competition Commissioner Joaquin Almunia, releasing the report, said it showed that guarantees were being used less and less.

“It is crucial for economic recovery that banks do not stay dependent on state support for longer than is strictly needed”, he said.

In all, 19 EU members received permission to put in place guarantees worth €4131.1 billion from October 2008 to the end of March this year, close to a third of the EU’s GDP.

Umbrella guarantees accounted for more than three-quarters of the volume. In the event member states issued the guarantees for 32% or €993.6 billion.

While Denmark got approval for guarantees worth 237.5% of GDP – the biggest in the EU, Ireland ranked second at 167.5%. But Ireland granted by far the biggest percentage of its GDP in guarantees to its banks at 167%. The next biggest was Cyprus at less than 20% of GDP.

Generally the bulk of state-guaranteed bonds was issued in the first quarter of 2009 when they reached a monthly average of 30% of banks’ total funding.

The amount of newly issued guaranteed bonds has been decreasing progressively since then and stood at an average of 4% of banks’ total funding in December.

In all, 19 countries have guarantee schemes and now three of them, Britain, France and Italy, have terminated them and the Netherlands has increased the price they are charging their banks.