ANALYSIS: Irish lenders have a long way to go before they can stand on their own, writes ARTHUR BEESLEY, European Correspondent  in Brussels

THE FIREFIGHT continues. Two years after the Government’s portentous intervention in the banking sector, the renewal of its guarantee over large corporate deposits shows that the main Irish lenders have a considerable distance to travel before they can stand on their own again.

With the fate of Anglo Irish Bank in the balance, yesterday’s announcement denotes extreme caution in Dublin and Brussels as yields on Irish sovereign debt spike upwards. For Ireland’s beleaguered taxpayers, already saddled with huge Nama liabilities and considerable recapitalisation costs, the ordeal continues.

The short weeks since Standard Poor’s downgraded its rating on Ireland have been marked by relentless pressure on the State’s bonds. It was no different yesterday as yields on 10-year debt rose at one stage above 6.1 per cent, with the difference in the price of Irish and German paper well above the levels prevailing when the EU and IMF agreed to create a €750 billion safety net for any distressed euro-zone country.

For Minister for Finance Brian Lenihan this illustrates the extent to which international investors are again questioning his economic plan and the potential of the Anglo debacle to undermine it. He insists that will not be the case but he has yet to win the argument.

The stakes are huge. Asked in his RTÉ interview on Monday whether one bank could bring a down a country, the Minister indicated that the Government has grappled with risks of that magnitude for two years. “Yes it’s an entirely reasonable question, and we’ve had to live with this danger since September 2008,” he said.

That was the date of the initial guarantee, which was granted in emergency circumstances after the Lehman Brothers collapse brought Anglo close to insolvency and threatened to pull other Irish banks into the abyss. Although other aspects of the scheme have already been extended, the protection over short-term corporate deposits was due to expire in three weeks.

This led to serious fears of capital flight from Anglo and Allied Irish Banks (AIB), prompting both publicly to plea for an extension. Whereas the woes of the nationalised Anglo are well known, AIB’s call for aid raised the spectre of a major clearing bank running into trouble if it was not helped. Whatever about the appalling cost of propping Anglo up, that is nightmare stuff by any standard.

The two banks’ decision to go public was not without significance, for any failure to protect them afresh could have proved self-fulfilling in terms of deposit loss.

The upshot of this is that other Irish lenders would require protection because corporate deposits – especially in the distressed conditions that currently prevail – inevitably migrate to the safest harbour.

The protection of such deposits is touchy, however, because they are typically overseen by professional managers who are employed to seek the best and most risk-averse deal possible. This means competition is stiff, raising concerns about unfair advantage for banks based in markets that enjoy state protection over those that do not.

For this very reason, the European competition authorities typically frown on guarantee schemes for such deposits. That was the case when Lenihan and his Cabinet colleagues unilaterally introduced the guarantee in 2008, a move that spooked their European colleagues and sent shockwaves through markets.

This time round the Minister took no chances, meeting face-to-face with competition commissioner Joaquín Almunia on Monday to ensure clear passage of the scheme before briefing his fellow Ministers yesterday.

Still, the combined efforts to keep afloat the Irish banks have yet to restore their health.

When the guarantee was first introduced, the word was that all would be fine within a couple of years when the storm passed. But the storm intensifies by the day.

As he emerged last evening from his meetings in Brussels, Lenihan acknowledged his prime task now is to restore the market’s confidence that he has a handle on the crisis “by finalising our banking resolution process”.

Extending the guarantee is but one act in a drama whose end is not yet in sight.

That the Minister would feel compelled to say on Monday that Anglo will not bankrupt the State points to high tension.