BANK DEMANDS for an extension to the two-year State guarantee scheme are being resisted by the Government amid a marked slowdown in talks between Minister for Finance Brian Lenihan and the financial institutions on a recapitalisation of the banking system.
Although Mr Lenihan told the Morning Ireland programme on RTÉ radio last Wednesday that he planned to meet with bank chiefs yesterday, no meetings were held and no alternative date has been fixed for any further meetings.
The slowdown comes after two meetings last month between the Minister and the chiefs of AIB, Bank of Ireland, Anglo Irish Bank, Irish Life Permanent (ILP), the Educational Building Society (EBS) and Irish Nationwide Building Society (INBS).
While some informed observers expect agreement in principle on the parameters of the recapitalisation process before business shuts for the Christmas holiday, the Minister and the institutions remain very far apart.
Mr Lenihan has signalled that the Government is willing to participate in the recapitalisation process to supplement new capital from private investors.
However, he is seeking a series of mergers to strengthen the sector and minimise any further risk to the institutions once they are recapitalised.
Most of the banks and building societies are strongly opposed to any consolidation in the sector, arguing that they can continue to trade safely through the recession and the credit crunch as independent institutions.
However, they are seeking extensions to the State guarantee scheme as its duration is seen as a hindrance to their capacity to raise day-to-day funding on international money markets with a maturity beyond September 2010.
Their capacity to continue to raise such funding with a maturity after that date will be further compromised as the risk of loan defaults rises in light of the recession.
As a result, informed sources say Mr Lenihan is now likely to use demands for an extension to the guarantee as a lever to advance the consolidation agenda in talks on recapitalisation.
The Department of Finance said last Friday that the possibility of guaranteeing individual sales of bonds maturing after September 2010 was "being considered".
In spite of that signal, however, senior officials in the department are now understood to be adopting a sterner stance in relation to demands for an extension to the guarantee.
While it is only with the consent of the European Commission that any extension could be granted, it is understood that Mr Lenihan does not plan at present to seek any such approval.
His spokesman only said that "the guarantee is due to expire after two years and is kept under continuous review".
Asked why the meetings he spoke of last week did not materialise, he said "the Minister for Finance has not met the financial institutions today due to other commitments".
He added: "The Minister is pleased to note that a number of the institutions have already made public their proposals for appropriate credit initiatives in relation to small and medium-sized businesses."
