THE UK government and British banking watchdog, the Financial Services Authority (FSA), expressed serious concerns about the involvement of Ulster Bank and First Active, the Irish subsidiaries of the UK-owned Royal Bank of Scotland (RBS), in the Irish bank guarantee scheme.
Meanwhile, Taoiseach Brian Cowen has not ruled out recapitalising Irish banks and has said the Government will do whatever it takes to maintain stability.
"We have never ruled out any issue," Mr Cowen said at a meeting of EU leaders in Brussels yesterday. "We have simply said we will do what is necessary to maintain the stability in the Irish financial system."
Ulster Bank and First Active said on Wednesday they would not be joining the guarantee. UK officials and the FSA were concerned that RBS would have to offer a counter-indemnity to the Irish State for insuring the liabilities of its Irish subsidiaries.
The British government is backing a £20 billion (€24 billion) recapitalisation of RBS which could see the UK take a stake of up to 60 per cent of the bank.
The UK government was concerned that if RBS agreed to cover the liabilities of its Irish subsidiaries covered by the Irish guarantee, it could be forced to cover similar guarantees in other states.
It was also worried about indemnifying another sovereign state on bank liabilities that were already covered under its own guarantee.
The FSA feared that if the RBS provided a counter-indemnity to the Irish State, the UK would have to inject more capital into the bank to cover the additional risks when it was already injecting a large amount of capital.
A spokesman for the Department of Finance and a spokeswoman for Ulster Bank Group both declined to comment.
The banking group opted not to join the guarantee, saying it was satisfied the UK government's recent measures ensuring liquidity and recapitalisation gave its customers "the protection and security they require during these unprecedented economic times".
Bank of Ireland fell 15.6 per cent to €1.62 yesterday and was down 29 per cent over the week. Anglo Irish Bank shed 14.2 per cent to €2.00. Irish Life Permanent gained 3.8 per cent to €2.45, while AIB rose 3.4 per cent to €3.63.
Credit ratings agency, Moody's, has assigned a "backed-rating of Aaa" to certain debt securities of the six Irish-owned lenders covered by the State for the two-year life of the guarantee.
The Aaa-rating is the highest debt-ranking.
Several EU states have invested state money into their banks in an effort to bolster the businesses so they can continue lending.
Britain announced a £37 billion bailout package for its struggling banks, funded by UK taxpayers.
Mr Cowen said the banking system was "critical" to the Irish market, but declined to speculate. "The future of the banking system and how it's to be restructured is a matter for the banking system itself. The Government will seek to facilitate positive development in that area as far as we can.
"We have to be mindful of taxpayers' money in this regard and we have to look at the wider national interest."
The Government is now paying a higher premium for its debt. On Tuesday, it paid an extra yield to sell €4 billion worth of three-year Government debt that was more than double the spread the State paid for 11-year debt last April.
The bonds were priced to yield 1.22 per cent over the benchmark German government debt.
That compares with the spread of 0.5 per cent that Ireland paid for a €7 billion in 11-year debt in April, its last debt issue in euro.
Austria, Spain and Belgium, which also have AAA ratings, have cancelled recent debt issuances.
