Irish plan may be only real EU money market salve

By Jamie McGeever - Analysis

LONDON (Reuters) - Ireland's effective underwriting of its entire banking system for two years has set a super-high bar for European Union-wide crisis coordination but it may now be the base line needed to restart frozen interbank money markets.

Dublin's unilateral step has been widely criticized for dramatically skewing the "level playing field" for intra-EU banking competition by lumping its taxpayer with potentially vast liabilities and protecting banks' shareholders.

But it has concentrated minds across the continent. Germany, Greece and Denmark have since indicated they will also guarantee depositors' cash, and the UK Treasury said it's prepared to take "radical" action if needed.

Yet the crucial difference that sets Ireland's plan apart is that its government not only guaranteed savers' deposits but also banks' wholesale liabilities.

That is to say, an institution lending to an Irish bank on interbank money markets now knows the borrower is good for the money because it has a government guarantee behind it.

And that difference is critical because the potential cost of effectively underwriting bank-to-bank lending compared with "just" retail deposits is incalculably higher.

Ireland has guaranteed some 400 billion euros ( 316 billion pounds) in total, just over double its entire annual economic output. Roughly half of the funds guaranteed are retail deposits.

If these figures are extrapolated across the EU, where total economic output last year was almost $17 trillion, it's easy to see the scale of the crisis.