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FINANCIAL CRISIS

Ireland steps in to protect banks

3 min

Following a record slump Monday, the Irish government offered a two-year guarantee on all deposits. The move came as Irish Prime Minister Brian Cowen is set to meet with French President Nicolas Sarkozy in Paris Wednesday.

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Ireland stepped in to protect its banking sector from the global financial crisis Tuesday, announcing a guarantee on all deposits and sending shares in Dublin surging back up after a record slump.

The main ISEQ stock market index closed up 7.37 percent on the day, bouyed notably by a 63 percent rise in Anglo-Irish Bank shares, a day after falling 13 percent on the back of worldwide credit crunch turmoil.

Prime Minister Brian Cowen defended his government's decision to provide the two-year blanket guarantee.

"The issue here is solvent banks, banks who have assets that are in excess of their liabilities, facing an unprecedented situation where there is a credit crunch," Cowen said.

The guarantee arrangement covers six main banks and safeguards retail and commercial deposits, as well as bonds, for two years, the finance ministry said.

The institutions involved are Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.

Analyst Scott Rankin of Irish stockbroker Davy put the value of the guarantee at up to 500 billion euros (720 billion dollars). Ireland's annual GDP totals 190 billion euros.

"With the US bailout voted down last night and (Belgian-French banking group) Dexia also getting a seven billion euro capital infusion... the Irish government has moved to take out its own bazooka," he said.

The stock market recovered immediately after the announcement, and by the end of the day shares in the Allied Irish Bank were up 16.16 percent, Bank of Ireland by 13.21 percent and Irish Life and Permanent by 35.82 percent.

Finance Minister Brian Lenihan said the decision to guarantee the lending of the banks meant that they would "find it easier to access funds from world markets."

"It is extremely important for our economy that they can do so because since the collapse of several institutions in the United States, it has been very difficult to access funds on international markets for Irish banks," he said.

"We must take action to secure the stability of our banking system."

Taxpayers would be protected, he added. "The facility provided by the government will be subject to a charge or levy to the bank itself," he told RTE state radio.

"The bank must pay that charge and the level of change will be determined by the Central Bank who will advise the government on it," he added.

Asked what action would be taken if the guarantee did not work, Lenihan said that the government had "drawn up contingency plans for every scenario."

Eurozone member Ireland, rocked by a property market meltdown and the global credit crunch, has entered a recession for the first time in 25 years after its economy shrank in the second quarter of 2008, according to official data last week.

Irish gross domestic product (GDP) contracted 0.5 percent in the second quarter of 2008 compared with the previous three-month period when the economy contracted 0.3 percent.

The "Celtic Tiger" economy had not experienced a recession -- defined as two successive quarters of negative growth -- since 1983.
   

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