Ireland says banks need further 24 billion euros
Ireland tried to draw a line under its financial crisis on Thursday by saying its banks need a further 24 billion euros ($34.11 billion) to withstand further economic shocks.
Irish Finance Minister Michael Noonan also unveiled plans to restructure the country's once mighty banking sector into just two lenders made up of Bank of Ireland and a combination of Allied Irish Banks and EBS.
The total capital figure was broadly in line with expectations, but analysts feared it could rise further given the European Central Bank did not reveal plans for a medium-term funding facility for the Irish banks, as had been expected.
Europe's debt crisis has spread into its banks, which are being forced by rating agency downgrades into the arms of the European Central Bank -- lender of last resort -- as credit markets shut their doors to them.
The ECB had been expected to announce a new medium-term funding facility for Ireland's banks, which would help cap future losses from the sale of the lenders' assets.
But internal disagreements within its Governing Council over the facility meant that plans to announce the new funding arrangement just after the Irish plan were postponed, euro zone official sources told Reuters.
It is going to be very, very difficult for those banks to raise the capital required and at some point a restructuring conversation needs to happen, said Michael Hewson, market analyst at CMC Markets in London.
Ireland's central bank said its four remaining banks would be required to maintain a minimum capital ratio of 6 percent under a so-called stress test imposed by European regulators which aimed to show they could withstand potential losses from a worsening of the economy.
Under the stressed scenario Allied Irish Banks needs 13.3 billion euros, Bank of Ireland needs 5.2 billion, EBS building society needs 1.5 billion and Irish Life & Permanent needs 4 billion.
Finance Minister Michael Noonan told parliament Ireland could use 17.5 billion euros of its own funds toward the cost of recapitalizing the banks and said the ECB and Irish Central Bank were committed to their funding.
He said the government would seek significant contributions from junior debt holders in its banks to pay for the cost of recapitalizing the industry and sell non-core assets to reduce the burden on the taxpayer.
Under the restructuring plans Ireland's banks will have to deleverage huge sums. Bank of Ireland will have to shed 30 billion euros of assets by 2013 and AIB and EBS combined will have to shed 23 billion euros of assets by 2013.
But he failed to address previous threats to impose losses on some 16 billion euros in unsecured senior bank debt not covered by a state guarantee.
We will... seek direct contributions to solving the capital issues of the banking system by requiring further significant contributions from other sources including from subordinated debt holders, by the sale of assets to generate capital and where possible by seeking private sector investors, Noonan said.
The ECB is opposed to any burning of senior bondholders for fear it could send the message that governments in other indebted euro zone countries may follow suit.
Irish Central Bank Governor Patrick Honohan said the government should not act on senior debt with the green light from European partners.
There is no question in the government's plan about doing anything to senior bondholders, he said.
A solution to Ireland's banking woes, now in their third year and the trigger for an 85 billion-euro EU-IMF bailout, would help allay fears that Dublin is in danger of a damaging restructuring that could trigger panic among investors and force other indebted countries like Portugal and Italy to follow suit.
But with Portugal edging ever closer to crisis -- figures on Thursday showed its budget deficit ballooned above target last year -- markets remained far from assured.
European stocks halted an almost uninterrupted two-week recovery rally on Thursday as rekindled fears over the European debt crisis prompted investors to book profits.
Without a medium term funding facility for Ireland's banks, Dublin could face a very harsh downgrade by Standard & Poor's (S&P).
S&P has warned it could strip Ireland of its A- rating after the results of the bank recapitalization plan. Moody's and Fitch rate Ireland at Baa1 and BBB+ respectively.
S&P downgraded Portugal to one notch above junk to BBB- this week and a cut to its banks followed on Thursday, raising the heat on Lisbon, which is widely expected to follow Greece and Ireland into an EU aid program.
The cost of insuring against a default by Portugal and Ireland rose on Thursday while Irish government bond yields remained elevated.
You don't need stress tests to know that Greek, Irish and possibly Portugal banks are in trouble, Deutsche Bank's chief risk officer Hugo Baenziger said on Thursday.
(Additional reporting by Carmel Crimmins and Steve Slater; Writing by Sophie Walker; editing by Alexander Smith)
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