Ireland guarantees bank deposits, borrowings

The government unveiled an unlimited guarantee on deposits at six banks one day after the Irish Stock Exchange suffered its greatest fall in history--and rumors spread that wealthy foreign depositors were withdrawing their millions from Irish institutions.

Investors embraced the government's dramatic intervention and Irish bank shares surged.

Finance Minister Brian Lenihan said all deposits in Ireland's six domestically owned banks would be taxpayer-guaranteed if any failed. The guarantee does not apply to foreign-owned banks in Ireland, because they are subject to their own parent nation's protections.

The covered Irish institutions are Allied Irish Banks, Bank of Ireland, Anglo-Irish Bank Corp., Irish Life & Permanent, Irish Nationwide Building Society and the Educational Building Society. State protection is to run for at least two years.

Crucially, the government guarantee--which followed Monday's record-setting 12.7 percent drop on the Irish Stock Exchange--also underwrites a bank's own debts to other institutions worldwide. If a protected bank cannot pay its creditors, the Irish taxpayer would cover the bill.

Lenihan estimated that the government had taken on a potential worst-case liability of 400 billion euros ($560 billion). That's double the country's annual gross domestic product, nine times its national debt--and 95,000 euros ($135,000) per citizen.

But Lenihan and Prime Minister Brian Cowen said they didn't expect the state to have to pay out a penny. They said Irish banks needed immediate support to strengthen their ability to borrow working capital from other banks.

"I have not handed money over to any bank!" Cowen said angrily during a parliamentary debate on the emergency measure. "I have provided the reputation of the Irish state to these banks so that they can gain access to funds, so that the economic life of this country can continue."

When opposition leaders accused him of providing a huge blank check to banks with no strings attached, Cowen rejected the claims and stressed that Ireland could not afford to wait for others--particularly in the United States--to act.