Ireland OKs world-leading bank guarantee

updated 7:29 p.m. ET Oct. 2, 2008

DUBLIN, Ireland - Irish lawmakers approved a comprehensive bank guarantee Thursday, granting taxpayer protection to all deposits and debts of Irish-owned banks.

The sweeping deal commits Ireland to insure unlimited deposits and the interbank debts of six Dublin-based institutions totaling $600 billion for the next two years.

Lawmakers in both houses of parliament overwhelmingly backed the emergency bill following 30 hours straight of debate — their first round-the-clock session since 1984. President Mary McAleese formally signed the bill into law.

Irish bank shares surged for the third straight day in celebration of a government policy designed to strengthen deposits and reassure foreign financiers that it's safe to lend money to Irish banks. The Irish Stock Exchange closed 5 percent higher, bucking Thursday's negative mood internationally.

But Ireland's left-of-center Labour Party complained that the government should have punished Ireland's banks for lending recklessly and rewarding themselves too richly.

Labour leader Eamon Gilmore said the chief executives of the six protected banks were paid a combined 13 million euros ($18 million) last year. He said Labour voted against the government plan "because we refuse to sign a blank check," and because it imposed no sanctions on the banks' overpaid leaders.

The European Union, Britain and other EU states battling their own banking crises complained that Ireland is promoting unfair competition.

Timeline Economy in turmoil A look at the events leading up to the mess on Wall Street.

In Brussels, EU competition spokesman Jonathan Todd said his department still hadn't received any formal explanation from Ireland about how its bank insurance program would work — and so had no way of knowing whether the EU will even clear the Irish plans as legal.

"Without notification we cannot undertake our analysis and we cannot take a decision," said Todd, who noted that authorities in Britain, Germany and several other European countries did seek advance EU approval for several emergency buyouts of failing banks over the past week.

Most other European countries cap their guarantees on deposits at 20,000 euros (about $28,000) and do not underwrite their banks' borrowings from other banks. France announced plans for an emergency summit Saturday during which EU financial chiefs would mull whether to raise those limits.

But Ireland's own experience suggests that raising state protections on deposits alone won't do muchg to reverse the greater problem besetting banks — to restore a steady diet of capital from other lending institutions.

Ireland last month raised its own longstanding deposit-insurance limit of 20,000 euros to 100,000 euros ($140,000), the second-highest in the EU behind Italy's limit of 103,000 euros ($145,000). But speculators continued to attack the shares of Ireland's four publicly listed banks amid speculation they were too exposed to failing loans from a severe property slump.

Banks face Feb. 1 deadline on compensation The nation's biggest banks face a February deadline for submitting employee compensation plans to the Federal Reserve, according to people with knowledge of the process. Obama: Job losses expected to continue Consumer spending tumbles, incomes flat Economy grows at best pace in 2 years New jobless claims drop slightly

Leaders of those banks pressed the government to intervene Monday as their companies' shares plummeted by as much as 67 percent within hours. The government's surprise decision to insure all their funding debts as well as deposits won relieved plaudits from the bankers.

"The oxygen supply for Irish banks was being cut off and healthy banks were starting to gasp for breath. This guarantee turns on the oxygen supply," said Denis Casey, chief executive of Irish Life & Permanent, the No. 1 provider of mortgages in a country that has seen property prices slide by more than 20 percent in the past year.

Shares in Irish Life & Permanent rose 9.8 percent Thursday. Niche small-business lender Anglo-Irish Bank Corp. jumped 21.5 percent. The two dominant retail banks, Allied Irish Banks and Bank of Ireland, rose 11 percent and 7.5 percent respectively.

Some economists warned that Ireland's financial sector may only have postponed its reckoning with swelling bad debts at home. They said Ireland had behaved selfishly at a time when EU governments should be cooperating.

Sir Howard Davies, former chairman of the Financial Services Authority in the United Kingdom, called the Irish decision "a very bad move" in part because it encourages money to flow from British banks to Dublin.

"Nobody has guaranteed wholesale deposits and bonds before. They've done it on a discriminatory basis — only for Irish institutions — and their action is seriously distorting the market or risks doing so," said Davies, who is director of the London School of Economics.

Irish Finance Minister Brian Lenihan said the government was negotiating with several foreign-owned banks, particularly those with British parents, to discuss possible entry terms.

Ulster Bank — which is based in the British territory of Northern Ireland and owned by Royal Bank of Scotland — has particularly widespread operations in the Republic of Ireland. Irish branches of Ulster Bank currently hold 29 billion euros ($40 billion) in deposits that help fund 64 billion euros ($89 billion) in loans.

MORE FROM WORLD BUSINESS

World business Section Front

Cadbury rejects hostile bid from Kraft Foods Nokia will recall 14 million faulty chargers China promises billions in aid, loans to Africa Plans approved for Disneyland in Shanghai Move over New York, London is new No. 1 Global wages falling this year, UN says Britain downsizes bailed-out banks Hundreds of UK bank branches for sale BP fined record $87 million for refinery blast Ford: China's Geely preferred bidder for Volvo World business Section Front   Add World business headlines to your news reader: