Ireland’s government decided today to wind down its bank guarantee by the end of March, according to two people with knowledge of the matter.
Irish officials see the nation’s banks, which cost 64 billion euros ($84 billion) to rescue since 2008, as strong enough to stand without a guarantee, said the people, who asked not to be identified, as the matter is private. Bank liabilities covered by guarantees for up to five years are unaffected, while deposits of up to 100,000 euros are shielded by a permanent central bank guarantee.
Ireland introduced a snap guarantee in September 2008 of almost all its banks’ liabilities, totaling about 440 billion euros, weeks after the collapse of Lehman Brothers Holdings Inc sparked a global financial crisis. Former Finance Minister Brian Lenihan in November 2010 was forced to seek an international bailout to prop up the country’s banks.
This marks “a major milestone for the Irish government in its attempts to unwind its near total backstopping of the Irish banking system,” said Owen Callan, an analyst at Danske Bank A/S in Dublin.
Finance Ministry officials in Dublin declined to comment today on the guarantee removal.
Finance Minister Michael Noonan said on Dec. 14 that the guarantee may be withdrawn as soon as the first quarter after lenders attracted deposits and shrunk their balance sheets since the government completed its last recapitalization of the sector in July 2011. Guarantee fees drain about 1 billion euros from banks’ income a year and hinder their confidence to lend, John Moran, the finance ministry’s top official, said last year.
Between July 2011 and the end of January this year, state-guaranteed banks’ deposits increased 10 percent to 154.3 billion euros, the finance ministry said on Feb. 14. Their European Central Bank funding reliance fell about 30 percent to 48 billion euros in the same period, it said.
The amount of bank liabilities covered by the so-called Eligible Liabilities Guarantee was 78 billion euros at the end of September, according to the National Treasury Management Agency. The ELG, introduced in December 2009, covers senior unsecured certificates of deposits, commercial paper, bonds and notes and deposits over 100,000 euros not covered by a separate retail deposits guarantee.
The nation’s two largest lenders, Bank of Ireland Plc and Allied Irish Banks Plc, withdrew their U.K. units from the ELG program last year. Both banks said in November they are prepared for the expiry of the guarantee.