Commissioner says Irish plan contravenes EU law


European Union Competition Commissioner Neelie Kroes said today that the Irish Government’s plan to provide unlimited guarantees on deposits in Irish banks contravenes EU law.

Ms Kroes said there was a discriminatory element to unlimited guarantees on bank deposits and that she expected Ireland to modify its guarantee plans.

She also said she had received assurances from her contacts in Dublin that the Government intended to modify the proposal before presenting it to Cabinet early this week.

The Irish guarantee scheme, which is intended to assist banks raise money in the funding markets, is currently begin drawn up by Central Bank and Department of Finance officials.

The scheme initially envisaged covering deposits at AIB, Bank of Ireland, Anglo Irish Bank, Irish Life Permanent, Irish Nationwide and EBS building society.

However, Ulster Bank, Bank of Scotland (Ireland)-Halifax, Danish-owned National Irish Bank and Belgian-owned IIB Bank have also applied to be covered.

"We are now in close contact. My people were in Dublin Friday and Saturday and returned with reports that changes will be made," Ms Kroes told Dutch TV today, noting there was a "discrimination element" in a blanket guarantee.

"A guarantee without limits is not allowed ... (we expect) that it will be brought into a form for which we can together state that it is in line with the treaty," she said.

Meanwhile this evening the German Finance Ministry announced that Berlin would guarantee all private savings accounts in Germany to an unlimited level as part of its response to the global credit crisis.

Department of Finance officials have indicated to the guaranteed banks that they would be seeking an annual charge equal to 0.2 per cent of the €400 billion in deposits and debts covered under the scheme.

Meanwhile Britain's new business minister Peter Mandelson criticised unilateral moves by individual countries to guarantee deposits and said they could hamper efforts to resolve the global financial crisis, the Sunday Telegraph newspaper reported. 

Mr Mandelson, who served as EU trade commissioner until his appointment to Prime Minister Gordon Brown's cabinet on Friday, told the paper in an interview that moves by governments such as Ireland and Greece to guarantee local bank deposits could lead to market distortions.

"The danger of this crisis is it may spark a new wave of economic nationalism, with each country looking for a 'get out of jail free' card. People have to realise that selective or national approaches could lead markets to look to parts of the financial system in a distorted way," he said.

He said the moves by Ireland and Greece were "likely to create distortions because some parts if the EU system are guaranteed and some are not."

Mr Mandelson said policy options needed to be thought through internationally and implemented collectively.

In Greece, a senior finance ministry official said on Friday that a Greek pledge to guarantee all deposits was a "political commitment" but not a plan to change legislation that would require financial backing.

In his interview with the Sunday Telegraph, conducted ahead of European crisis talks held yesterday, Mr Mandelson stopped short of endorsing reported suggestions of a collective EU bank rescue fund of €300 billion.

At the end of the EU meeting, European leaders vowed to do all they could to fend off the financial mayhem that has snowballed out of Wall Street and is now hitting banks in Europe.

But their final statement was more a declaration of principle and call for coordination of national responses than an announcement of instant new measures to deal with the worst financial crisis since the 1930s.