The current guarantee was due to end today but was extended to give the banks a better opportunity to raise funds on the market over the next six months.
The seven Irish banks covered will need €74bn to roll over current loans towards the end of September but a leading economist has warned that they could find it difficult, even with the extended guarantee.
UCD Economics professor Karl Whelan said the Irish banks could face stiff competition, as many European banks will be looking to raise big sums of money on the markets, including the Spanish and British banks.
“We are in a very precarious situation. There is a huge amount of money that has to be paid back before the end of September and no great signs that the bond markets across Europe are eager to lend.
“The fact that the state will guarantee this money may be sufficient – if financial markets believe the Irish economy is in good enough shape then everything will be fine.
“None of the Irish banks have borrowed from the market over the last few months. There has been very little issuance and we are not the only country that needs to borrow,” he said.
“If the banks cannot raise the money to pay off their maturing bonds, then it will be up to the state to pay it off, and it’s not clear that there is that money in the kitty,” he said.
The NTMA (National Treasury Management Agency) has about €20 billion in reserve but the banks will need about €78bn, the Dáil was told recently.
In the event the government could have to resort to seeking money from the EU/IMF fund established by Brussels, he said. Since much of the money is owed to French and German banks they would probably be willing to lend, but may attach austerity conditions.
A spokesperson for the Department of Finance said the approval of the Eligible Liabilities Scheme (ELS) “would assist the banks rolling over their debt until the end of the year”.
The Irish Banking Federation said the extended guarantee “would bring more certainty to the funding of banks over the next few years and months”.
Whether they will need a further extension was difficult to predict but they would have another look at it on 21 December when this one is due to run out, their spokesman said.
The European Commission has said banks with lower credit ratings must pay more for the facility – as a consequence AIB and Bank of Ireland is expected to pay 0.3% more and Anglo Irish Bank 0.4% more than they are paying at present.
Commission spokesperson Amelia Torres said the increased charges were to encourage banks to borrow from the market instead, and if they could not they should restructure.
AIB and Bank of Ireland have already issued restructuring plans to the commission and a decision is expected next month.
The ELS scheme was introduced last December as the original guarantee scheme from September 2008 covered debt just up to the end of September this year, irrespective of its maturity date.