EU to judge if banking guarantee breaks law

GOVERNMENT SAFEGUARDS: THE EUROPEAN Commission has said it will investigate whether the Government's decision to guarantee deposits…

GOVERNMENT SAFEGUARDS:THE EUROPEAN Commission has said it will investigate whether the Government's decision to guarantee deposits and lending at six Irish-owned banks breaks EU law.

But it also signalled it would continue to take a flexible approach to implementing EU state aid rules in the face of ongoing turmoil in the banking sector.

"If there is any state aid involved, then we will look at this at a matter of urgency," a commission spokesman said yesterday when asked about the Irish scheme.

He said the Irish authorities had contacted the commission the night before the Government made its announcement yesterday, but it still had not received the details of the scheme.

READ MORE

"The length of time needed to make a decision on the scheme's legality depended on the amount of detail supplied and the level of co-operation with the Irish authorities," he added.

That EU officials would continue to take a flexible approach was underlined by the role competition commissioner Neelie Kroes played in talks to agree the part-nationalisation of Fortis bank at the weekend and the fact that Brussels has not intervened to overrule the recent bailout of any banks.

Minister for Finance Brian Lenihan briefed French finance minister Christine Lagarde and the chairman of the Eurogroup, Luxembourg prime minister Jean-Claude Junker, about the Irish guarantee scheme on Monday night before it was unveiled yesterday.

"I mentioned to them the need for a wider European approach to this so that there is a common standard of protection," said Mr Lenihan. "It is important that Europe protects its financial system but, in the absence of a Europe-wide system, there is an onus on the Government as the sovereign body with responsibility in this State to take action."

The commission has the power to launch legal action against the Government if it feels that its guarantee to Irish banks gives them an advantage over foreign-owned banks operating in the Republic or in other EU countries.

A spokesman for Ms Kroes said last night that Brussels would have to evaluate whether any state aid was offered through the guarantee scheme and whether it distorted competition.

"If, for example, the banks in question were paying for the guarantee at a commercial rate, then there may be no state aid. If there was any state aid, the commission would then have to judge whether any distortion of competition was disproportionate to the problem that the measure introduced is meant to address," he added.

Questions have been raised about whether existing state aid rules may hinder efforts to stabilise the banking sector. But the commission defended the rules yesterday, saying they were "part of the solution not the problem" because they gave confidence to banks that rivals would not get an unfair advantage out of the crisis.

"The state aid rules have proven over the last few months to be a good framework to ensure a co-ordinated response to these problems," a spokesman said.