THE GOVERNMENT is planning to extend the bank guarantee beyond the end of the year to ease funding pressures at the State-backed financial institutions as borrowing remains difficult and very costly.
The extended Government guarantee, the Eligible Liabilities Guarantee (ELG) introduced last year to help banks raise up to five years’ funding on specific bonds, expires at the end of the year. The Department of Finance has said the Government would “continue to support the banks through a guarantee scheme as appropriate”.
Minister for Finance Brian Lenihan said in a speech this week that there would need to be “a more convincing exit strategy” from the bank guarantee in the years ahead. Central Bank governor Patrick Honohan has said he expects the ELG to be phased out over quarters rather than years.
One way the Government may use to wean banks off the guarantee is to increase the cost of the guarantee. ELG fees are on average about five times more costly than the original guarantee.
Borrowing by Irish lenders from the European Central Bank rose 25 per cent last month to €119 billion as banks have struggled to raise bonds in the debt markets.
No institution has sold a benchmark bond since last April. Bank of Ireland sold £300 million (€343 million) of Government-backed debt last year but paid well over the odds to secure the funding.
The ELG is subject to a review every six months and any extension must be approved by the European Commission. EU competition commissioner Joaquín Almunia said this month he would allow governments to extend support to banks until 2012.
