November 7, 2012 / 5:11 PM / 5 years ago

UPDATE 1-Ireland likely to lift bank guarantee early next year

* Guarantee cost Irish banks almost 1 bln euros last year

* Fin dept head says removal would be big step for sector

DUBLIN, Nov 7 (Reuters) - Ireland will probably remove an expensive state guarantee on bank deposits early next year to help ease pressure on the country's loss-making lenders, the head of Ireland's finance department said on Wednesday.

Ireland's almost fully state-owned banks, whose rescue cost the equivalent of 40 percent of annual economic output, have had widening losses partly because of the guarantee.

"We have been conducting a very intensive analysis in the last couple of weeks about the removal of the bank guarantee probably in the early part of next year," department of finance secretary general John Moran told a parliamentary committee.

"Absent any external shocks to the system between now and then, we would think that that is a perfectly feasible target."

Moran said each bank would have to make its own decision as to whether it wanted to continue with the guarantee or not.

The Eligible Liabilities Guarantee (ELG) means deposits are guaranteed by the state should banks get into trouble. The banks have to pay a fee to the government for the guarantee, which cost the country's three remaining domestic banks almost 1 billion euros ($1.3 billion) last year.

Bank of Ireland's chief executive told parliament last week that his bank, the largest in the country and the only to avoid full state control, was prepared for a termination of the guarantee at the end of the year.

It cost the bank 212 million euros in the first six months of the year, almost a quarter of its overall pre-tax loss.

The ELG scheme, which covers bank deposits and certain liabilities up to a maximum maturity of five years, has already been removed from deposits made with Bank of Ireland and Allied Irish Banks' British arms.

Moran said scrapping the guarantee would be the next big step forward for the stability of the banking sector.

Its removal would have no negative effects on Ireland's fiscal targets either as the government's budgetary projections have not assumed any guarantee fees for next year, he added.

Moran also said another big step would be for the banks to resume issuing debt via a securitisation on Irish mortgages but he also said that the banks were not yet ready to be sold off by the state.

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