Rumours swept the Dail, the Irish parliament, last night that the Government’s controversial decision on Tuesday to guarantee the debts and deposits of the country’s six largest banks was the result of the threat of imminent collapse of one of its leading financial institutions.

Opposition anger was mounting last night, during debate of the Finance Bill, that the Government was keeping the public in the dark over the real motives behind the extraordinary decision to commit the equivalent of three years of the Republic’s GDP to covering the banks. Outside the chamber the corridors buzzed with details of dramatic meetings in Government Buildings in Dublin on Monday night between representatives of the banks, regulators, powerful business figures and the Government.

Last night it was reported that Brian Lenihan, the Irish Finance Minister, was called twice yesterday by Alistair Darling on behalf of UK banks over fears that Dublin’s blanket guarantee for savers was causing an exodus of funds from UK rivals.

Mr Lenihan is said to have informed the Chancellor that the measures, which will likely be pushed through the Dail this evening, was the result of the threat of imminent collapse of one of its leading financial institutions, which would have led to the failure of a second.

The background to what has been described as the biggest blank cheque in the history of the Irish state appears to have been the fear that one of Ireland’s biggest banks would declare itself bankrupt at the opening of business on Tuesday morning.

Very senior Irish business figures said that the bank’s insolvency, in the face of a €1.5 billion (£1.2 billion) debt to a German bank that it was unable to pay, would pull down several large companies and possibly a second bank. It was this and the fear that a domino effect would begin – fuelled by the fact that a number of banks are owed billions of euros by property developers – that forced the Government to take action.

Financial institutions that have not been included in the scheme may challenge the Finance Bill, once passed.

Enda Kenny, the Fine Gael opposition leader, said that he was aware of “evidence of substantial outflows” from nonIrish financial institutions to the Irish banks covered by the Government guarantee. He called for an extension of the deposits guarantee to nonIrish owned banks to avoid breaching competition rules.

The woes of Brian Cowen, the Taoi-seach, stretch beyond Irish shores, with EU regulators angered that the Irish banks were being given an unfair competitive advantage over banks elsewhere in Europe.

Dublin’s unilateral initiative caught European Commission officials unaware and badly damaged the picture they had painted of close cooperation between Brussels and national capitals as governments struggled to prop up their banking sectors.

Nor will it make relations any easier between Mr Cowan and his European colleagues when they meet for their Brussels summit in two weeks’ time. He is already under pressure to indicate how his country might approve the Lisbon Treaty after rejecting it this year – with no evidence that the Irish people will change their minds if asked to vote again. Now he will have to justify these financial guarantees.

President Sarkozy declined to confirm Mr Cowen’s assertion, after a meeting between the two leaders in Paris yesterday, that he fully supports the Irish banks guarantee.

In veiled criticism of the Irish move, José Manuel Barroso, the Commission President, said yesterday: “It is not just a problem of injecting liquidity. We also need to inject credibility in the European response. That is why we are urging member states for closer cooperation.”

Without committing himself to the possibility of a pan-European agreement on the protection of citizens’ savings, he added: “We need to improve the consistency of deposit guarantee schemes.”

The situation varies across Europe. Legislation provides for a minimum guarantee per account of €20,000, but in Italy and Germany this can rise to €100,000, while in the UK a £50,000 minimum is being mooted.

The strongest criticism of Ireland’s bailout plan came from Neelie Kroes, the EU Competition Commissioner, who has been in close contact with several governments over the past five days as they put together packages to prevent their banks from collapsing.

“I would like to plead with national governments today not to act unilaterally, but rather to continue their practice of consulting the Commission when they are confronted with problems that may require state aid to the banking sector,” she said.

“That’s a must. Governments must pick up the telephone and take the opportunity of allowing us to give a helping hand.”

The rewards ... and the risks

The pros

— Savings are fully covered, no matter how large the amount. The six banks are: Allied Irish Bank, Bank of Ireland, Anglo-Irish Bank, Irish Life & Permanent, Irish Nationwide Building Society and Educational Building Society. Savings with the UK Post Office are also covered, as they are operated by Bank of Ireland

— For those with a large amount, say £1million, the Irish banks offer the opportunity to park all their cash in one place with complete security

— Anglo-Irish is currently paying 7.05per cent on £500 or more with its one-year fixed rate bond and up to £2 million can be invested

— If you are worried about not having a local outlet, you could use the UK Post Office, which has 14,000 branches around the country

The cons

— The dramatic share price falls in some Irish banks before the Government's announcement might make would-be depositors ask just how solid they are

— The size of the guarantee, £317 billion, means the Irish Government could be severely stretched if it had to start making payouts because one or more banks failed

— With the exception of the Post Office, none of the organisations covered by the scheme has substantial UK networks

— Poor rates. Apart from Anglo-Irish, few of the accounts would be in best-buy tables. A big influx of money could further reduce the need for them to offer competitive rates

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