updated 10/1/2008 5:17:37 PM ET 2008-10-01T21:17:37

Ireland's bold decision to guarantee every penny of deposits at Irish-owned banks looks to some like a psychological masterstroke in the banking crisis — an emergency measure that could force countries across Europe and beyond to follow suit.

But European neighbors complained Wednesday that the move, announced Tuesday, has weakened confidence in their more modestly insured banks and encouraged nervous savers to shift money to the new safe haven of Dublin.

They called on European Union competition authorities to force an Irish retreat — even as policy-makers in London, Paris and Washington debated hefty hikes to their own countries' maximum guarantees. The revised U.S. bank bailout before Congress includes an increase in the insured limit from $100,000 to $250,000.

"The simple answer is: Yes, what the Irish have done should be a template for others to follow," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, where shares in Irish banks enjoyed their second straight day of strong gains following calamitous falls Monday.

That Irish blank check for deposits and interbank loans amounts, in a doomsday scenario, to a maximum estimated liability of $560 billion — just to repay the debts and deposits of six banks. That's double the country's annual gross domestic product, nine times the national debt and $135,000 per citizen.

But Ireland's government leaders themselves have stressed that they made the unprecedented promise only because they calculated that by doing it, shares would rebound, foreign capital would flow in, and they would never have to spend a cent of taxpayer's money bailing out a bank.

Prime Minister Brian Cowen said he had "not handed over any money to any bank. I have provided the reputation of this state to the banks."

Some bank customers in London said Wednesday that faith in the banking system is fading and politicians' reassurances ring hollow.

"There's no panic now, but there might be if one of the major banks fail," said David Hickman, 62, leaving a branch of NatWest bank. "Then I think we'll have a serious problem."

Several economists at home and abroad cautioned that Ireland's example might be appropriate only for other small countries with a handful of key financial players, not hundreds.

"Ireland gets kudos, and rightly so, for acting before we got past the point of no return for a particular player here. But I'm not sure you could replicate this approach across Europe," said Dan McLaughlin, chief economist at the Bank of Ireland, one of the six institutions receiving government backing.

He said that Irish banks had been struggling to attract capital from foreign banks. The key part of the Irish guarantee, he said, was its promise to foreign wholesale lenders that their money deposited in Dublin would be refunded if any Irish bank failed.

"The likes of France, Germany and Italy would have hundreds upon hundreds of banks. So their liabilities would be astronomical, and their national credit ratings are not as good as Ireland's," he said, referring to Ireland's status as a country carrying a continent-low percentage of debt.

The EU requires a minimum $28,000 protection on deposits. France guarantees $100,000, Italy $145,000 and Norway $340,000.

Ireland raised its minimum five-fold to $140,000 last month in an initial, failed attempt to stop speculators' assault on Irish bank stocks.

In Brussels, EU Competition Commissioner Neelie Kroes declined to criticize the Irish move outright — but noted that the Irish had failed to coordinate its move with other EU members. Her office said it would investigate whether Ireland engaged in unfair practices.

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

Ireland's own EU representative, Financial Services Commissioner Charlie McCreevy, suggested that his colleague were being unrealistic. Governments like Ireland "don't have the luxury of waiting forever and a day to make up their minds about critical matters," the former Irish financial minister said.

In London, the British government said it planned to raise its own deposit guarantees to $89,000 from the current limit of $62,000. But bank lobbyists said that wouldn't be enough to compete with the Irish.

"While we support proposals aimed at reintroducing stability to the financial markets, we need fair play for financial institutions across Europe," the British Bankers Association said in a complaint about the Irish move.

Some economists warned that other countries might regret following the Irish — because it was reckless to promise to pay a bottomless bill.

"In responsible governments these policies have to be backed by realistic funding," said Philip Shaw, chief economist of Investec in London.

"Offering a blanket protection is dangerous to public finances. Acting to maintain faith in the financial system is understandable, but most governments would be loath to follow the Irish example," he said.

Shaw laughed out loud when asked whether Ireland was now a safer place to deposit money than Switzerland, where bank guarantees top out at just $27,000.

"If it was really that smart to proclaim an unlimited guarantee," he said, "more governments would have done it already."

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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