The Government was warned of the potential cost of a blanket guarantee to the six main banks the day before it was introduced.

International consultants Merrill Lynch warned the Government that the guarantee could cost up to €500bn, which the State could not afford to cover if required.

However, Taoiseach Brian Cowen has defended the Government's decision to introduce the guarantee scheme in September 2008.

Documents published by the Oireachtas Public Accounts Committee show the Government believed the risk to the taxpayer from its €440bn guarantee scheme would be offset by €500bn in assets held by the banks.

An email from Merrill Lynch on 29 September 2008 advised the Government to introduce a secured lending scheme for the banks, under which commercial property could be exchanged for Government bonds or cash.

Read email | View documents | Document breakdown

It said the alternative was a blanket guarantee covering all depositors and senior creditors, which would involve more than €500bn.

Merrill Lynch said this would 'almost certainly negatively impact the State's sovereign credit rating and raise issues as to its credibility'.

It added that the wider markets would be aware that Ireland could not afford to cover the full amount if required.

However, the email also states that 'there is no right or wrong answer' to the problem facing the Government.

It also claimed that apart from liquidity concerns, 'all of the Irish banks are profitable and well capitalised', but warned that liquidity for some could run out in days rather than weeks.

Mr Cowen has insisted that the bank guarantee decision was the right one, and he stood over it.

He said Merrill Lynch had put forward a range of options and the Government had to choose the best one.

Mr Cowen said there had been ‘wishful thinking’ on the part of the banks.

Fine Gael Finance Spokesman Michael Noonan said: 'The documents confirm that Brian Cowen and Brian Lenihan torpedoed the Irish economy through a series of catastrophic decisions.'

'Significant buffer' of assets

The documents released this morning also show the Department of Finance told the Taoiseach that there was a 'significant buffer' of bank assets.

It is understood the documentation has been partially edited by the Department of Finance for reasons of Cabinet and commercial confidentiality.

Speaking on RTÉ's Morning Ireland, Public Accounts Committee Chairman Bernard Allen said that although the Department of Finance had not provided all of the documentation, the committee would publish everything it had received.

Former Financial Regulator Patrick Neary is reported to have informed Mr Cowen that Anglo Irish Bank was in good health three days before the Government moved to rescue it.

Mr Neary is quoted in a report in today's Irish Independent as having told Mr Cowen in September 2008 that Anglo Irish Bank was not insolvent.

He is also reported to have said that the bank had enough assets to cover its debts.

Mr Neary made the statement at a meeting on 25 September 2008, which was three days before the Government's bank guarantee scheme.

He is reported to have told Mr Cowen that the bank was simply unable to continue on a current basis from a liquidity point of view.

The Government has so far put more than €14bn into the troubled bank.

Mr Neary made a similar statement about Irish Nationwide at the meeting.

Watch Patrick Neary's appearance on RTÉ's Prime Time in October 2008 after the guarantee scheme was announced.

Merrill Lynch advice was ignored - Noonan

Fine Gael Finance Spokesman Michael Noon has said the Government did not take the advice of Merrill Lynch regarding the guarantee or the affairs of Anglo Irish Bank.

This cost the taxpayer €22bn, Mr Noonan told RTÉ's Six One.

Mr Noonan said ministers are relying on the best possible advice, but it is unusual that the advice of Merrill Lynch was ignored and of the Department of Finance was not taken into account.

Mr Noonan asked what advice did the Government base their decision on?

He said we have to accept that banks were untruthful, and they got their way through undue influence.

He added that on the basis of what his party were told on the night, Fine Gael did the right thing by supporting the guarantee.