Ireland To End Controversial Bank Guarantee Scheme
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The Irish government will no longer provide state guarantees for eligible deposits and liabilities at its three surviving banks, said Finance Minister Michael Noonan on Tuesday, ending a controversial four-year-old scheme, meant to safeguard the nation’s financial system from collapse.
The blanket guarantee, called the Eligible Liabilities Guarantee Scheme (ELGS), was introduced in September 2008 after the collapse of Lehman Brothers in the U.S. sparked concerns of a similar calamity in Ireland.
The Irish government will no longer provide state guarantees for eligible deposits and liabilities at its three surviving banks, said Finance Minister Michael Noonan on Tuesday, ending a controversial four-year-old scheme, meant to safeguard the nation’s financial system from collapse.
The blanket guarantee, called the Eligible Liabilities Guarantee Scheme (ELGS), was introduced in September 2008 after the collapse of Lehman Brothers in the U.S. sparked concerns of a similar calamity in Ireland.
However, the government soon found itself being forced to repay bondholders and nationalize five failing banks at the cost of 64 billion euros ($85 billion), which prompted former Finance Minister Brian Lenihan to seek an international bailout as massive bank liabilities threatened sovereign finances in 2010.
Noonan said that the decision to end the insurance scheme came as the country’s financial system appeared close to reaching normalisation.
“I am very pleased to announce the government’s decision to end the bank guarantee for new liabilities from midnight on 28 March 2013,” said Noonan, as cited by the Associated Press.
[quote]”We feel the time is right. The banking system in Ireland is normal enough to proceed now without a guarantee,” he added.[/quote]Noonan noted that the directors of the three remaining banks – the Bank of Ireland, Allied Irish Banks and Permanent TSB – had all “wanted to get back to normal banking without artificial aids or supports.” Bank of Ireland Plc and Allied Irish Banks withdrew their U.K. units from the ELGS program last year, as they were preparing for the expiry of the guarantee.
About 73 billion euros of liabilities are currently covered by the scheme, including 55 billion euros in deposits.
Noonan said that the ending of the ELGS scheme would enable the banks to return to profitability, while reducing the State’s borrowing costs and assist with Ireland’s exit from the EU-IMF bailout programme at the end of this year.
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Noon added that the removal of the controversial ELGS was the culmination of government efforts to “break the negative link between the banks and the state”.
The three banks also welcomed the end of the scheme, as they had been paying the government over 8 billion euros in fees in order to insure their liabilities.
“The ELGS was introduced as a measure to stabilise the financial system at a time of unprecedented market turbulence, which is no longer evident,” said Allied Irish Bank chief executive David Duffy in a statement. “We welcome the announcement today and expect that this move will have a positive impact on the operating performance of AIB over time as the bank returns to long term sustainability.”
The Government’s decision “marks a further significant step in the normalisation of our banking system,” said the Irish Banking Federation.
The decision to end the guarantee however is unlikely to affect the vast majority of deposit holders at the three covered banks. Bank liabilities covered by guarantees for up to five years will remain until expiry, while deposits of up to 100,000 euros are shielded by a permanent central bank guarantee.
