THE Government is likely to reduce the scope of its blanket guarantee for investors holding bonds in Irish banks, one of the world's leading rating agencies predicted yesterday.
Finance Minister Brian Lenihan guaranteed most bank borrowing from bond holders last September, following the collapse of Lehman Brothers and the near meltdown of the Irish financial system.
Mr Lenihan's guarantee was among the most generous in the world and sparked criticism from the opposition parties. It lapses next September unless the Government decides to renew it.
London-based Fitch Ratings expects Ireland to amend the guarantee scheme to conform more closely with other European Union countries, said Matthew Taylor, a senior director in Fitch's Financial Institutions' team.
The European Union is slowly seeking to ensure that bank guarantee schemes across the union offer uniform guarantees, to create a level playing field among competing banks.
Fitch yesterday placed the short-term issuer default ratings (IDR) of Allied Irish Banks, Bank of Ireland, EBS and Irish Nationwide Building Society on rating watch negative and said it will probably downgrade the ratings later this month when it knows more about the Government's plans.
All four banks have a short-term rating of 'F1+'. Fitch also affirmed Anglo Irish Bank's short-term IDR at 'F1+'.
The ratings only apply to senior and dated subordinated bonds of the five credit institutions. These bond types have become something of a political football of late with both Mr Lenihan and Fine Gael finance spokesman Richard Bruton arguing about whether such loans should be paid off.
Both men were forced to admit in recent days that they had mixed up the two types of debt while attempting to debate their differing schemes for bailing out the nation's troubled banking sector.
Fitch added that Irish banks continue to need guaranteed funding and forecast that some sort of guarantee scheme will be introduced next September for most of the banks' debts as part of a less comprehensive scheme than the present one.
Fitch said it expects to review and "most probably downgrade" the short-term IDRs of AIB, Bank of Ireland, EBS and Irish Nationwide but not Anglo.
"The Irish Government's 100pc ownership of Anglo Irish Bank corporation leads Fitch to believe that in the short-term it should continue to benefit from the strongest capacity to repay financial commitments," Mr Taylor wrote.
Bloomberg meanwhile reported that corporate bond sales have surged in Europe, driving this year's issuance to a record €848bn, as borrowers from Italian carmaker Fiat to Dutch phone provider Royal KPN tapped credit investors.
Issuance is already 11pc ahead of the total for all of 2008 and demand for risk assets has driven the extra yield buyers demand to hold investment-grade corporate bonds down to 2.02 percentage points, from as high as 4.63 percentage points in March, Bloomberg said. "The market is back on fire after its usual summer lull," said Juan Esteban Valencia, a credit analyst at Societe Generale.