EU approval may be sought to extend €450bn bank guarantee

THE DEPARTMENT of Finance has indicated the Government may seek European Commission approval for the extension of the €450 billion…

THE DEPARTMENT of Finance has indicated the Government may seek European Commission approval for the extension of the €450 billion guarantee for the banking system.

It follows calls from a second bank, Anglo Irish Bank, for the guarantees to be extended because the Irish system is not yet strong enough to stand on its own without them.

There are two guarantees in place. The first, which was given in the aftermath of the collapse of Lehman Brothers in 2008, covered all of the existing debts of the Irish banks.

The circumstances surrounding the granting of the guarantee, which was contrary to the advice given to the Government, have attracted controversy because of the potential risk that it exposed the State to. It expires in September.

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The second guarantee, which expires in December, was given in December 2009 and guarantees certain types of borrowing by the banks for up to five years.

Mike Aynsley, the chief executive of Anglo Irish Bank, said yesterday that the Irish banking system was not yet stable enough for the banks confidently to raise money without the guarantees. It follows a similar call earlier this week from the managing director of Allied Irish Bank, Colm Doherty. He said the guarantees should be extended for another 12 months to minimise the possibility of a funding crisis for the Irish banks.

The five banks covered by the guarantee have to borrow in the region of €70 billion in the autumn to repay debt borrowed under the guarantee. This will present a challenge to the Irish banks, according to Fitch, an international credit rating agency.

A rerun of the euro zone sovereign debt crisis of earlier this year – or some other cause of market nervousness – may make international banks reluctant to lend to Irish banks without a State guarantee, Mr Doherty has warned.

A spokesman for the Department of Finance said last night: “The bank guarantee scheme has been extended until December and will be reviewed on an ongoing basis.”

A departmental source said there had been no formal request from any banks and no dialogue had begun. It was likely a number of other EU states would find themselves in similar situations and may seek to have their guarantees extended. A six-month extension was more likely, the source added, and the fee charged by the Government would be higher in “order to wean the banks off the guarantee”.

Mr Aynsley also addressed the bank’s decision to take control – along with Ulster Bank – of Arnotts, the Dublin department store. He said the plan was to stabilise the company, which has debts of €750 million, before seeking a buyer.