The highly influential European Central Bank (ECB) has questioned the way the Government plans to guarantee billions of euros of debt for the banks, saying the scheme may be too generous compared to those of other European countries.
The bank, led by Jean-Claude Trichet, has given the green light to eurozone countries to guarantee short-term bank debt, but only for borrowings running from three months to a year in duration.
Ireland's revised scheme, however, allows even short-term debt of less than three months to qualify for a guarantee -- which has drawn a negative reaction from the Frankfurt-based body.
"Granting government guarantees for bank debt with a maturity of less than three months should be avoided to the extent possible," said the ECB opinion, which was signed by Mr Trichet and passed to the Government before Christmas.
The Government had requested an opinion from the ECB on the scheme in late October.
The ECB said Ireland's banks still faced significant challenges, but that this was not enough reason to allow short-term debt to get a full state guarantee. The bank stated that countries like Ireland had to avoid undermining a single policy on bank rescues in Europe.
"It is essential that the scheme will not impair the implementation of the single monetary policy throughout the euro area," stated the opinion.
The ECB noted how the Irish scheme -- known as the Eligible Liabilities Guarantee Scheme -- had no restrictions on the kind of short-term debt the Government would stand over.
"It is noticeable that, under the draft scheme, there is no stated minimum maturity for any guaranteed liabilities."
The ECB added that the Irish scheme opened up the danger that borrowings of less than three months might be guaranteed in practice. The ECB opinion is clear that it supports a "level playing field" when it comes to governments designing their bank rescue plans.
"Uncoordinated decisions among members states should be avoided as they may involve a fragmentation of the euro area money market," it said.
The ECB has already given opinions on the original bank guarantee scheme -- which was agreed on September 29, 2008 -- and said its latest opinion should be read in the context of that earlier view.
The Government was also quoted in the opinion explaining the need to guarantee even very short-term borrowings.
One reason given was that Irish banks continued to suffer from liquidity problems despite some recent improvements.
Secondly, the Government pointed out that deposits of less than three months were also guaranteed and, thirdly, it was trying to wean banks off this practice in the latest scheme.
The Government was, however, complimented for ensuring the scheme is to be reviewed on a six-month basis and that these reviews would be passed on to the ECB.
The bank also welcomed the Government's commitment to end the practice within five years as it helped to "harmonise'' policies across Europe.
The decision to charge banks for use of the scheme was also praised as fitting with ECB policy, the bank said.