Lenihan moves to assure EU Irish guarantee is legal


IRISH GUARANTEE:MINISTER FOR Finance Brian Lenihan held talks with EU competition commissioner Neelie Kroes last night to try and assure her that the Irish State bank guarantee scheme is legal.

At a meeting of EU finance ministers in Luxembourg, Mr Lenihan told Ms Kroes he may extend the guarantee to foreign banks with a significant retail presence in the Republic. However, he insisted the Government's guarantee could not be extended to "post box banks" which merely set up an office in Dublin and had no real banking operations there.

He also dismissed criticism from other EU states such as Germany and Britain of the Government's move last week to guarantee all bank deposits and borrowings.

"Countries throughout the European Union are taking measures to assure stability of their banking system. We'll be discussing all of the aspects of this problem this evening at our meeting. It is important we restore confidence to our banking system."

Ms Kroes had objected at the weekend to the "unlimited" nature of the Irish guarantee, but softened her stance yesterday, saying she was confident the plan could be agreed.

"I welcome signs of openness by the Irish authorities to apply the scheme to other banks with significant operators in Ireland," Ms Kroes told the European Parliament's Economic and Monetary Affairs Committee before meeting Mr Lenihan.

"I'm confident that, with some fine-tuning, the Irish scheme could be put into line with EU law."

Brussels is also concerned the scheme may distort the EU banking market because it is not restricted to private deposits but includes bank borrowing. By not restricting the State guarantee scheme, the commission has concerns the measures may be disproportionate to the challenges faced by the Irish banking system and contravene EU state-aid laws.

A commission spokesman signalled that a decision by Germany to guarantee private deposits did not seem problematic at first glance. "The measures seem to be limited to retail bank deposits and so less liable to give rise to distortions of competition. In general, retail deposit guarantee schemes for savers can be an appropriate policy response regarding the stability of the banking system."

Several countries followed Germany in offering state-backed deposit guarantees yesterday in response to fears about the health of the EU banking market. Last night European Commission president José Manuel Barroso issued a renewed plea to governments to co-ordinate their national responses to the financial crisis.

"I am urging all governments of the European Union to co-ordinate their action," he said, while acknowledging that each state had to act with its own instruments because the EU was not a single state. "I recognise that the cases may vary and that there are different national contexts. As a consequence, there cannot be uniform responses. But if we act on the basis of the same principles, our responses will be converging."

In Luxembourg today, ministers from all 27 EU states are expected to discuss finding a common plan to inject confidence into the markets. Proposals will include a plan to raise all deposit guarantees to €100,000 across the EU. An Italian proposal for EU states to set aside 3 per cent of gross domestic product to bail out banks is another idea that may be aired.