The two big Irish banks still outside state control faced the prospect of government ownership on Wednesday, amid expectations stress tests results due to published this week will show the countrys financial system creaking under the weight of the worst recession in living memory.
Irish Life & Permanent suspended trading in its shares early on Wednesday, after a 45 percent drop on Tuesday, while Bank of Ireland extended recent declines, after CEO Richie Boucher and Chairman Pat Molloy met Finance Minister Michael Noonan to press the case for remaining independent.
Just months after the EU and IMF granted the former Tiger economy a humiliating 85 billion euro bail out, stress test results set to be published on Thursday are expected to show banks have made little headway in fixing balance sheets hit by a property crash that has left one in 10 mortgages in distress.
The Central Bank has carried out capital and liquidity assessments on four lenders Allied Irish Bank, Bank of Ireland, the Educational Building Society, and Irish Life & Permanent.
Its almost certain they are going to need more capital, which means majority government ownership for those not already there, said Niall OConnor, an analyst at Credit Suisse in London. There is some talk of full nationalisation but I would think a majority stake is the more likely option.
The Irish government has already taken control of Anglo Irish Bank, Allied Irish Banks, EBS Building Society and Irish Nationwide Building Society after injecting 46.3 billion euros into the banking system over two the past two years.
The state-controlled banks have been frozen out of debt markets, have lost over 20 billion euros in deposits and have seen a rise in mortgage arrears since the last stress tests were conducted in early 2010. Irish GDP fell 1 percent in 2010 to 154 billion euros, after a 7.6 percent decline in 2009.
Under Novembers bail out, 10 billion euros were earmarked as immediate support for banks, with another 25 billion euros set aside as a contingency.
The tests are likely to show they need in the range of 20 to 25 billion euros, said Stephen Lewis, chief economist at Monument Securities. That means they will use almost all the contingency funds under last years bailout.
Concerns that the existing bailout would not be enough to secure the banks' immediate future drove Irish bonds and the euro lower this week. The countrys 10-year bond traded near a record spread to German debt of around 680 basis points early on Wednesday, equivalent to an annual interest rate of 10.13 percent.
The European Central Bank has said it will wait for the results of the stress tests before making any decision on a new funding package for Ireland, amid speculation it will soon announce a 60 billion euro medium term loan facility.
ECB loans outstanding to Irish banks hit 117 billion euros last month, more than a third higher than a year ago. Irish Central Bank loans rose four-fold to 70 billion euros over the same period.
Talk in Ireland this week suggest the EU may intervene in the crisis by lowering the interest rate charged on Brussels' portion of the 85 billion euros bailout fund, a decision on which could come as soon as an informal EU finance ministers' meeting in Hungary on April 7-8.
Meanwhile, Irish Prime Minister Enda Kenny said on March 25 that talks with the European Central Bank on fixing the banks will resume after the stress tests are published.
In a move interpreted by some as a tactic to encourage the authorities to help, the Irish government has hinted it may require holders of the some 16 billion euros of senior bonds in Irish banks to absorb some of the losses.
The government, which took office last month, wants a sustainable and comprehensive solution that involves recapitalization, but also an element of burden sharing as well as a funding package for Irish banks, Agriculture Minister Simon Coveney said on Monday.
Under the terms of the bailout Ireland can impose losses on banks subordinated debt, but the ECB is opposed to similar treatment for senior bondholders, amid concern it would lead to a liquidity crisis in capital markets across Europe.