Irish guarantee all bank deposits for two years

The guarantee covers Allied Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life & Permanent, Irish Nationwide building society and ­Educational building society and is by far the most extensive taxpayer support for a banking industry seen so far.

Finance minister Brian Lenihan said: "What we're doing here is guaranteeing the lifeblood of the banking system.

"Were liquidity to dry up in the Irish banking system in the weeks ahead the inevitable result would be economic catastrophe for this country."

Only two weeks ago the government raised the deposit protection guarantee for savers with Irish banks to 100,000 (£80,000) from its previous 20,000.

But yesterday saw a massive slide in share prices of all the major Irish financial groups, with Anglo Irish down 45% and Irish Life & Permanent down 34%.

The new guarantee covers all money borrowed by Irish banks from other financial institutions and includes retail, commercial, institutional and interbank deposits, bonds, senior debt and dated subordinate debt.

The guarantee, which came in at midnight, covers existing and new debt and runs until 28 September 2010. It also covers London branches of all the main Irish banks. Shares in the six financial institutions rose sharply.

Some commentators called for a similar plan to be launched in the UK, although others said the potential cost would be too vast.

It remains to be seen whether the European Union will allow the scheme as critics were quick to point out that it put Irish banks at a massive competitive advantage to their peers in the UK and on the Continent.

"We ask the question, who would put their excess funding in a UK, German or Icelandic banks if the AAA government of Ireland stands behind its Irish bank debt," said Hank Calenti of Royal Bank of Canada.

It was not immediately clear what price the banks will pay for the guarantees, but the government made clear it required bank co-operation.