Brian Lenihan: higher bond fees

Mortgage holders and small businesses will be forced pick up an extra €1bn bank tab this year after the government raises the price of the extended guarantee from July.

Bank borrowing costs under the "eligible liabilities guarantee" are set to skyrocket next month when the Department of Finance imposes new, higher fees for issuing bonds under the cover of government backing. The government will now be charging an extra 1.5%-3.5% ? depending on the institutions ? on top of the already high prices Irish banks have to pay in the wholesale money markets to fund their lending. With more than €41bn in debt to roll over before the end of the year, this will add about €1bn to the funding costs of the covered banks over just six months.

Analysts said the new costs would ultimately land on bank customers.

"The banks will just pass the cost onto people with standard variable mortgages, SMEs and current account holders," said one Dublin bank analyst who had been briefed on the new charging structure. "In the case of Anglo and Irish Nationwide, the government is really just paying itself."

The new pricing will be based on what it cost to insure the debt of a similarly rated bank from August 2007 to August 2008, before the Lehman Brothers collapse. The government will then add half a percent for short-term debt and up to 0.9% for longer-term debt.

For a riskier bank such as Anglo Irish Bank or Irish Nationwide, this could add up to 3% to the cost of borrowing. Stronger institutions, such as Bank of Ireland and AIB, will pay as little as 1.5% for short-term money and less than 2% for term debt of a year or more.

The move comes amid ongoing chaos in the global money markets, with both the cost of borrowing and the cost of insuring debt trending higher for European banks. Wholesale lenders are especially worried about the possibility of sovereign default in the eurozone, which could seriously damage bank balance sheets and lead to cascading defaults throughout the financial system.

The government collected €91m from covered banks under the ELG in the first quarter. Banks have paid €810m since the guarantee was introduced in 2008.