Ireland braces for banking stress tests

DUBLIN, (AFP) - Ireland, rescued by a huge EU/IMF bailout last year, could be forced to nationalise more banks after stress tests that are expected to show they need billions of euros in additional funds.

The Irish Central Bank will publish the outcome of capital and liquidity tests on Allied Irish Banks (AIB), Bank of Ireland (BoI), the Educational Building Society (EBS) and Irish Life & Permanent (IL&P).

The tests, which are a requirement of the international bailout, will assess capital and liquidity levels to determine whether the four lenders can withstand more macro-economic shocks over the next three years.

Ahead of the results, due at 1530 GMT, AIB and BoI shares were suspended by the Irish Stock Exchange to prevent turmoil on the markets. Trading in IL&P stock remains closed until Monday amid rumours the state could take a stake.

The Irish Times reported that the finance minister in the new government, Michael Noonan, would propose a major restructuring that could signal the “virtual nationalisation” of the entire sector.

The tests could prompt Noonan to adopt “a radical new approach” to the crisis, the paper reported citing a government source.

The Irish Independent, meanwhile, reported that between 20 billion euros and 25 billion euros ($28-35 billion) could be committed to the four lenders to make them strong enough to withstand any further losses.

The paper, which did not cite its source, said Noonan’s shake-up of the sector could force together the EBS and Allied Irish Banks while also helping the four banks to sell off assets.

Rabobank analyst Jane Foley said the stress tests would reveal “the size of the black hole” in its banking sector.

“Dublin is hoping that this announcement will convince investors that there will be no more negative surprises and that it can avoid a debt restructuring.

“The market is sceptical on both these points. The Irish banking/sovereign crisis will continue to play out for some time yet -- as will the fiscal crisis in Portugal,” she said.

Ireland’s governing coalition, which took power earlier this year, held negotiations Wednesday with the European Union, the European Central Bank and the International Monetary Fund on the plans, the Irish Independent added.

Ireland, which received a huge 85-billion-euro ($115-billion) bailout loan last year from the EU and IMF, is plagued by worries over its struggling banking sector amid ongoing eurozone debt tensions.

The former Celtic Tiger’s banks were particularly hard hit by loan losses on toxic or high-risk property investments, while many homeowners are still struggling to keep up with their mortgage payments.

The results are due at a key stage in the eurozone debt crisis, as fears mount that Ireland’s fellow eurozone member Portugal could be next in line for an international bailout, following the rescue of Greece last year.

Under Ireland’s bailout agreement, 10 billion euros was earmarked as immediate support for the banks, with another 25 billion euros provided as a contingency fund for the troubled sector.

Analysts predict that the total sum required could be somewhere between 18-25 billion euros.

At the height of the financial crisis, Ireland nationalised four lenders -- Anglo Irish Bank, the Educational Building Society, Irish Nationwide Building Society and Allied Irish Banks -- and took a large stake in Bank of Ireland.

Ireland’s economy, battered by the global financial crisis, costly bank bailouts and a domestic property market meltdown, has now contracted for the last three years.

The Central Bank assessments are separate to Europe-wide stress tests being conducted by the European Banking Authority whose results are due in June.