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Bank debt guaranteed by State scheme drops to €87bn from €375bn

The amount of bank debt guaranteed by the State through the Eligible Liability Guarantee (ELG) scheme has dropped to €87bn, around a quarter of the initial bank guarantee.

The banking guarantee of 2008 has become notorious for shifting the cost of meeting banking losses to the State from private investors, ultimately undermining investor confidence in the State.

State guarantees have been in use in one form or another since then, largely through the ELG.

The State was on the hook for a staggering €375bn when the guarantee was first introduced, according to the Department of Finance. That has dropped steadily to reach €87bn by the end of July this year.

Much of the original money covered by the guarantee has been paid off by the banks, in part through €64bn of taxpayer-funded recapitalisation and rescues -- including, controversially, money owed to "bondholders".

Squeezed

The bulk of the cash now covered by the guarantee is made up of customer deposits in banks, according to the official data. However, 30pc of the remainder is still owed to bank lenders, compared to 70pc protecting customer deposits.

The scheme helped keep money in the Irish system and prevents bank runs. It is costly, however -- banks have paid the State €3.37bn to use the scheme over the four years. That has been good news for the Exchequer, but it squeezed banks' cash flow.

Michael Noonan did consider letting the scheme lapse when it expired at the end of last year but opted to expand it until the end of this year. He's due to make a decision on whether to roll it out for another year in the coming months.

The ELG scheme only covers customer deposits of more than €100,000, a separate scheme covers smaller deposits. There are no plans to scrap the deposit protection scheme.

Irish Independent