For Ireland, the end of its "blackest day" is in sight as the state mulls ending the bank guarantee that contributed to the nation losing its economic sovereignty.
"Elimination of the guarantee would send a powerful message that the entire Irish banking system is moving back to normalcy," said U.S. billionaire Wilbur Ross, whose WL Ross & Co. owns 9.3 percent of Bank of Ireland, the nation's largest bank.
Four years ago, then Irish Finance Minister Brian Lenihan tied the state's fortunes to a bust financial system when he guaranteed 440 billion euros ($576 billion) of bank liabilities. Lenihan, who died last year, said it averted a "nuclear winter." His successor Michael Noonan has said the Sept. 30, 2008, decision "will go down in history as the blackest day in Ireland since the Civil War broke out" in 1922.
With concerns about the banking system and public finances abating, Noonan said Dec. 14 that the guarantee may be withdrawn as soon as the first quarter of next year. The cost to insure against Ireland reneging on debt payments using five-year credit-default swaps has dropped to 220 basis points from a peak of 1,196 on July 18, 2011.
The yield on the benchmark 2020 bond, which declined 4 basis points to 4.63 percent Monday, has fallen from 14 percent in July 2011. Bank of Ireland and Allied Irish Banks are raising funds in the credit markets for the first time since 2010, before the government was forced to seek an international rescue as the financial system came close to collapse.
In all, the state has committed 64 billion euros, or about 40 percent of gross domestic product, to the banking industry and the government has taken over five of the nation's six largest banks.
"Ireland had two crises at the time, a banking bust and a massive structural deficit that was hidden by income relating to the construction and credit bubble," said Owen Callan, an analyst at Danske Bank in Dublin. The country "probably could have survived one, but not both," he said.
Ireland sought 67.5 billion euros of rescue funds from international creditors in November 2010. Before the bailout, the yield on the benchmark Irish 10-year bond reached 9.20 percent and credit-default swaps on the nation's debt rose to 604 basis points.
Two years later, signs of stability are emerging. While the fiscal deficit remains the highest in the euro region, the government is moving ahead with tax increases and spending cuts to narrow the shortfall to less than 3 percent by 2015. Irish bonds are the second-best performers in the euro area over the past year, trailing only Portugal.
Deposits in guaranteed banks rose 11 percent to 155 billion euros in October from 14 months earlier, according to data from the Finance Ministry. Last week, Bank of Ireland, which raised 4.2 billion euros of capital by forcing losses on subordinated bondholders, became the first Irish bank to issue new junior debt since the nation's 2008 rescue of its lenders.
Bank of Ireland and Allied Irish, the second-largest lender, last month issued their first public bonds in more than two years, raising a total of 1.5 billion euros of unguaranteed residential mortgage-backed bonds.
The amount of bank liabilities covered by the current guarantee program fell to 78 billion euros at the end of September from a high of 440 billion euros, according to the National Treasury Management Agency.
Bankers are now pushing to end the guarantee, which costs lenders about 1 billion euros of fees per year.
The current program, introduced three years ago, includes commercial paper, bonds and notes, and deposits over 100,000 euros that aren't covered by a separate retail deposit guarantee. The pledge means the state would have to be step in when banks are unable to meet their liabilities.
"The high cost is a major impediment to lending because it takes the profitability out of lending," Ross said. "The idea of bank profitability isn't popular nowadays, but the reality is that with all of the capital regulations now in place, profits are the main way for banks to be permitted to increase their lending. At present, no Irish bank is profitable."
While the expiry of the guarantee may heighten the possibility of deposit flight, the risks are easing, Fitch Ratings said on Dec. 4. Fitch raised its outlook on Ireland's debt last month to stable from negative, the first positive move by a ratings company on Ireland since the crisis emerged.
"A withdrawal of the scheme would be another step towards the recovery of the Irish banking sector, but the recovery will be protracted," according to Fitch.
With approval last week from the European Commission to keep the measure in place for another six months, the government is treading carefully. Removing the guarantee on Dec. 31 creates "a sort of deadline you don't necessarily need," John Moran, the Finance Ministry's most senior official, said Nov. 21.
Ending it will cost the government even as a struggling domestic economy curbs tax income. The state may ultimately gain as profitable banks would become more easily sold, said Stephen Lyons, an analyst at Dublin-based securities firm Davy.
"The banks will also be better able to extend credit to the economy on cheaper sources of funding, which should also ultimately help the government's tax revenues," Lyons said.
— With assistance from Cormac Mullen in Dublin.