Ireland hit its banks with a hefty penalty to take loans off their hands and said they needed at least €22 billion ($30 billion) in extra funds to recover from a property collapse that was worse than feared.
A series of official announcements late on Tuesday revealed the discount on property loans Ireland's National Asset Management Agency (NAMA) is taking from stricken banks and the scale of additional capitalization needed as a result.
NAMA, the government's so-called “bad bank,” said it would buy loans with a total nominal value of €81 billion from what were the country's three largest banks and two of its building societies.
The average discount on a first tranche of loans, to be transferred over the coming days, is 47% - much more than the 30% average estimated by the government last year for all loans acquired over the course of 2010.
The deeper discount reflects the magnitude of the property market collapse, particularly in the UK and Ireland, and Finance Minister Brian Lenihan acknowledged what the banks faced was huge.
“At every hand's turn our worst fears have been surpassed,” he told parliament.
“The banks played fast and loose with the economic interests of this country,” he added, referring to “appalling lending decisions that will cost the taxpayer dearly for years to come.”
Fully nationalized Anglo Irish Bank needs by far the most - €8.3 billion now and possibly a further €10 billion in future.
Of the listed banks, Allied Irish Banks Plc, Ireland's second largest bank by market value, needs to raise €7.4 billion of fresh capital, but it was given some time to sell assets before a decision on whether it needs another state bailout is made.
Even so, Lenihan said, the state might have to take a majority stake in AIB, whose shares have plunged over the past two days in anticipation of negative news.
AIB is to start selling assets immediately in the United States, Britain and in Poland, where it owns lender BZWBK, which it describes as "the jewel in its portfolio."
Bank of Ireland, Ireland's largest bank by market capitalization needs to find €2.66 billion, but Lenihan said it was expected to raise much of that capital privately, leaving the state a minority shareholder.
Already last year, the Irish state was forced to nationalize Anglo Irish Bank and Lenihan said on Tuesday the state was also taking full ownership of EBS Building Society and Irish Nationwide Building Society, as expected.
Dire as the banks' situation was, officials have said the cost to the state was manageable after its implementation of austerity measures. In the December budget, the government announced tough spending cuts of some 4 billion euros to address one of the deepest recessions in Europe.
“The sovereign is in a position to conduct this exercise now on the basis of the public finance changes that we brought about over the past couple of years,” Prime Minister Brian Cowen said.
Lenihan described restoring credibility in the banks as “the ultimate phase of the resolution of our crisis.” (Reuters)