State allowed to maintain guarantee for ‘fragile’ banks

THE state will continue to guarantee short-term bank liabilities including corporate and inter-bank deposits and debt securities in Ireland’s banks to the end of the year, the European Commission has agreed.

Finance Minister Brian Lenihan had asked for the extension after fears companies would withdraw short-term money from AIB, Bank of Ireland and Anglo Irish Bank when the guarantee ran out at the end of the month.

Mr Lenihan said that the commission agreed to the extension as it understood the fragile state of the Irish banks. He did not rule out looking for a further extension in December.

It is also hoped that the decision will make it easier for the banks to roll over up to €26 billion of debt that matures this month.

That debt, together with the uncertainty over what will happen to nationalised Anglo, has led to the rate of interest the Government must pay for loans to increase dramatically over the past few weeks.

The spread between Irish and German 10-year government bonds widened 34 basis points yesterday to 376 basis points compared to 306 on May 7 before the €750bn bailout fund was agreed.

The guarantee extension “will be well received for reducing the systemic risk of the weaker players in the market,” Sebastian Orsi, a Merrion Capital analyst, told Bloomberg.

Short-term corporate deposits are worth an estimated €30bn to the Irish banks and are more important to them than to those in other countries, a source said, as they are put on deposit by the large number of multinationals operating in the country.

The minister said: “This is an important support to the Irish banking system facilitating their access to both short and longer term funding to help maintain the overall stability of the banking sector and complements the broad Government strategy to restore fully the banking system and maximise its contribution to overall economic recovery”.

Retail deposits of up to €100,000 continue to be covered by the Deposit Guarantee Scheme. Ireland will be the only state continuing to guarantee short term corporate deposits as the other 16 countries with such a guarantee have agreed to withdraw it at the end of this month.

Mr Lenihan also held talks with the commission on whether to wind up Anglo and over what length of time or maintain part of it as a “good bank”, but no decision is expected for a few weeks.

Fine Gael MEP Jim Higgins attacked the idea of keeping Anglo afloat in the European Parliament.

“The money which our Government intends to throw into the black that is Anglo will never offer a return to the state and is money that could be used to allow the economy to grow and be invested in creating jobs, education and health.”


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