MINISTER'S INITIATIVE: THE GOVERNMENT has guaranteed the deposits and debts of Irish-owned banks and building societies in an effiort to help the six lenders raise money as the banking crisis has frozen money markets where they raise short-term funding.
The proposal, which guarantees the entire Irish-owned part of the banking system for two years, exposes the State to the liabilities at the banks totalling €400 billion.
The Government believes the guarantee will ease concerns about the financial strength of the institutions and improve banks' access to funds in international markets.
It intends to charge the six lenders a fee, which has yet to be agreed, for the guarantee.
The Central Bank said the Government's decision was taken "with a view to protecting financial stability".
The bank said the guarantee would enable banks to access funds and "to provide credit to companies and households".
"This action by the Irish authorities confirms our commitment to the stability of the financial system," said the bank.
Minister for Finance Brian Lenihan said that liquidity, which is essentially short-term funding that enables Irish financial institutions to fund their day-to-day operations, had become "scarce" in the global banking system since the collapse of US investment bank Lehman Brothers last month.
He criticised the US authorities for allowing the bank to collapse.
"My personal view is that the United States authorities were mistaken in permitting that bank to go to the wall. It has had very serious consequences for the world financial system," he said.
The Minister said he was determined "to ensure the stability of our banking system" and that he would "take whatever steps necessary to ensure that".
Mr Lenihan said he did not believe that the guarantee would expose the Irish taxpayer to the liabilities of the six institutions. The debts amount to more than double the value of the Irish economy.
"I do not see a hazard or an exposure to the decision that I have arrived at because the taxpayer has a vital interest in seeing that the bloodstream of our banking system is maintained," he said.
"Were liquidity to dry up in the Irish banking system in the weeks ahead, the inevitable result would be economic catastrophe for this country.
"We are a small exposed economy who are more globally exposed than any economy in any other member state in the European Union. For us not to have a viable banking system would paralyse the trade of this country and reduce us to a powerless position in all the markets in which we buy and sell our goods and services."
Asked if the Government could afford to take on the liabilities, which amounted to almost ten times the national debt, Mr Lenihan said: "We have to have faith in ourselves as a nation and a people that we are capable of having a viable banking system."
The Government announced the guarantee for the six Irish-owned lenders to calm investors after shares in the four Irish publicly-quoted banks fell the most in a quarter of a century on Monday.
Investors responded positively, with the Iseq index of Irish shares closing up almost 8 per cent as bank shares rose strongly.
The Iseq index of Irish financial shares surged 28 per cent, its biggest gain in at least 15 years, as Anglo Irish Bank jumped 67 per cent, erasing its sharp 47 per cent fall on Monday.
The country's largest mortgage lender, Irish Life Permanent, rose 35.8 per cent, followed by Bank of Ireland which climbed 20.8 per cent and AIB which rose 18 per cent.
Debt markets, on which banks rely to raise funding, gave the State guarantee "a resounding thumbs-up", said bank analyst Emer Lang at Davy stockbrokers.
The cost of insuring Irish bank debt from default, a measure of financial stress, fell sharply. However, the cost of insuring Irish Government debt against default increased.
Mr Lenihan said the Government would guarantee varying degrees of the six institutions' debts, comprising covered bonds, senior debt and subordinated debt, in an effort to boost investor and customer confidence.
Mr Lenihan said that under his preliminary assessment of the State's guarantee scheme, the Government's cover would not apply if an Irish bank was acquired by a foreign financial institution.
He said the Government was not assuming risks undertaken by the Irish-owned banks.
"The Government is not underwriting shareholders' funds, risky or hazardous investment in the banks.
"The Government is looking at ways to outline ways to help the banks," said Mr Lenihan.
