State seeks longer bank guarantee

IRELAND IS seeking to extend its bank guarantee scheme until the end of this year in discussions with the European Commission that will be completed this month, according to Minister for Finance Brian Lenihan.

Ireland last month joined 13 other EU countries – including Germany, Sweden, Spain, Latvia and Poland – in getting its state guarantee scheme approved until end-June and analysts expected Dublin to look for a further extension. Ireland, battling hard to manage a heavy sovereign debt burden, first issued a guarantee for some €400 billion of bank liabilities at the height of the credit crisis in September 2008, in what then was one of the most extensive schemes of its kind.

The guarantee, originally for two years, was amended last year to give banks scope to issue debt with maturities of up to five years, but still with a 2010 issue deadline and periodically reviewed by Brussels.

“The terms of the prolongation of the scheme being finalised with the commission would see it being extended under the current terms and conditions until September 29th, 2010,” Mr Lenihan told the Dáil. “Beyond this, the guarantee would be modified to provide for a prolongation . . . to the 31st of December . . . as an issuance window for liabilities of between three months and five years duration. It is likely that the pricing of the guarantee will also change in line with the pricing structure outlined by the European Commission.” The Government would eventually like to phase out the guarantee, a big potential liability for a state with one of the euro zone’s biggest debt burdens.

The decision to seek an extension follows turmoil in sovereign and corporate debt market triggered by concerns about the ability of heavily indebted states to service borrowings. Fears eased a little yesterday after a successful auction of Spanish debt.