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Government may seek to extend deposit guarantee

The Government has indicated to the European Commission it may ask next year for approval to extend the existing blanket guarantee on bank deposits, which is due to expire in 16 months' time.

This has been highlighted by the Department of Finance in recent communications with Brussels, according to sources, as it goes about seeking the green light for the more immediate issue of extending the state guarantee for certain debt issuances.

The six main lenders covered by last September's guarantee have been successful in raising a combined €11.25bn by tapping the markets under the scheme. However, they have only been able to raise funds that mature before the coverage expires in September 2010.

Finance Minister Brian Lenihan confirmed in his emergency Budget last month that the State planned to extend the guarantee for future issuance of debt securities with a maturity of up to five years.

It is understood that legislation governing this extension will be finalised within the next three to four weeks.

Agency

The department had at one stage looked at setting up a new agency, along the lines of France's Societe Financement de l'Economie Francais (SFEF), that would raise billions of euro from longer-dated bond sales, which would then be dispersed among covered institutions.

This was being given serious consideration in February and March, when banks were experiencing severe difficulty in the funding markets. The thinking at the time was that the use of a state-run special-purpose vehicle to raise money could avert a situation where a bond placement from one of the covered institutions might fail -- leading to a domino effect across the sector.

On the other hand, such a solution loaded more risks on the Government as it borrowed billions from global investors to plug the yawning gap in the public finances.

In the middle of last September, the Government increased the statutory limit for the deposit guarantee scheme from €20,000 to €100,000. This was followed within two weeks by the announcement of a blanket guarantee on all deposits and other bank liabilities, as global markets went into meltdown.

Government sources stressed yesterday that no decision would be made until next year on whether the guarantee on deposits would be extended. They said that it would be entirely down to the state of the financial markets at the time.

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