THE EUROPEAN Commission has given its formal approval to an extension of the State guarantee over short-term business deposits in Irish banks until the end of the year.

The commission’s decision, which comes days before the original protection was due to lapse, follows an unambiguous statement of support for a such an extension from competition commissioner Joaquín Almunia a fortnight ago.

It comes against the backdrop of mounting anxiety in Brussels about the cumulative impact of the financial burden on the Government as a result of the Anglo Irish Bank rescue and a steep increase in the State’s borrowing costs.

The measure was introduced to help avert the prospect of large-scale deposit loss from Anglo if the guarantee for large business deposits were lifted. Anglo had sought an extension to the guarantee scheme, as had Allied Irish Banks.

A further consideration behind the measure is to improve the prospects of other Irish banks refinancing billions of euro in Government-guaranteed debt before the end of the month.

Following an earlier extension to the guarantee over longer-term bank liabilities, the latest extension covers short-term corporate and interbank deposits to the end of 2010 and certain debt securities. The renewed guarantee comes at a price with higher fees to be levied on participating banks according to their credit ratings.

Welcoming the commission’s decision, Minister for Finance Brian Lenihan said the guarantees over short-term and long-term securities stood among a range of measures to help the banking system meet the credit needs of the economy as it recovers. Mr Lenihan has left open the question of whether he would seek a further extension at the end of the year.