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Ireland seeks to eliminate state guarantee program

NoonanThe Irish government recently decided to put an end to its guarantee program, a move that could indicate that the nation’s three main banks are healthy enough to stand on their own.

Earlier this month, the Irish government made a deal with the European Central Bank to turn its major bank debt into long-term bonds with substantially low interest-only payments, leading the country to ultimately eliminate its guarantee program, TimesUnion.com reports.

Michael Noonan, Ireland’s finance minister, said that the decision demonstrates that the nation may soon resume its own normal debt auctions.

“We feel the time is right,” Noonan said, according to TimesUnion.com. “The banking system in Ireland is normal enough to proceed now without a guarantee.”

Noonan said that the nation’s three main banks, including Bank of Ireland, Allied Irish Banks and Permanent TSB, “want to get back to normal banking without artificial aids or supports.” The banks were required, under the insurance program, to pay premiums that cost a total of $1.3 billion, TimesUnion.com reports.

The Treasury is set to announce the auction of 10-year government bonds for the first time since 2009, when interest rates sought by bond investors increased to extremely high levels. The International Monetary Fund and European Union affiliates extended an $88.2 billion credit line to maintain Ireland’s discount rates through the end of the year.

Ireland’s financial institutions were able to access international credit easily after switching to the euro currency in 2002, and much of the credit financed property development across the U.K., U.S. and in Europe. After the 2008 financial crisis, however, many of the loans went bad as property prices fell, according to TimesUnion.com.

The Irish government developed overnight an insurance program that it said would be “the cheapest bailout in history,” under the expectation that taxpayers would not be on the hook as reassured investors continued to purchase Irish bank bonds. The guarantee program, however, eventually become a legal obligation to nationalize bond repayment.

While Ireland began with six main banks, the government shut down two of them, merged another into Allied Irish Banks, and nationalized and split up Irish Life & Permanent, leaving Allied Irish and Permanent TSB under state ownership. Bank of Ireland is the only bank that remains a largely private bank, though the government does retain a 13 percent stake, TimesUnion.com reports.

Most of the sour property loans have been moved to the government-owned National Assets Management Agency, a “bad bank” that seeks to gradually sell off its portfolio.

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