It is the most dramatic and comprehensive bank bail-out in Europe since the Scandinavian rescues of the early 1990s and may serve as a model for Britain and other countries that so far have been muddling through from one mishap to another with a mish-mash of ad hoc policies.
The state guarantee exceeds 200pc of Irish GDP, marking a new phase in the escalation of the crisis.
The move came as Standard & Poor's cut Iceland's sovereign credit rating from AA- to A+ following its nationalisation of Glitnir Bank. It is a warning that the cascade of bank bail-outs on both sides of the Atlantic could start to undermine the credit-worthiness of Western states.
S&P warned that the tiny Nordic island is now saddled with liabilities that dwarf its economy.
The euro suffered the sharpest drop since the launch of the currency, dropping almost 3pc at one stage to $1.40 against the dollar in a day of high drama across Europe.
Belgium, France, and Luxembourg stepped in to rescue Dexia, the world's biggest lender to local authorities. The trio agreed to inject €6.4bn in fresh capital after the share priced crashed on Monday. Dexia's top management stepped down.
"We must have total confidence in the safety of the French banking system: there is absolutely no reason to panic," said Christian Noyer, head of the Banque de France.
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