Ireland is publishing stress tests on its four surviving banks Thursday _ and analysts expect the results to force all of them to come under majority state control and perhaps even shove the country into an eventual default.
Regulators are revealing numbers on two banks that are already majority state-owned _ Allied Irish Banks and the Educational Building Society _ and two others expected to join that club soon: the Bank of Ireland and Irish Life & Permanent.
The results are widely expected to show that last year's estimated potential losses for Irish banks _ euro54 billion ($76 billion) _ were far too low. Economists said the new total would likely approach euro80 billion ($110 billion) or more, about half of Ireland's entire economy.
"The government is trying to remove uncertainty. But if we are going to spend up to euro80 billion to recapitalize our banks, that's just too big for us to manage. It will not work," said Jim Power, chief economist at Friends First, a Dutch-owned insurance company in Ireland. "We need a major European initiative quickly, otherwise the future of the euro is under serious threat."
Ireland plunged into a financial morass after its six banks spent a decade gorging themselves on real estate loans that started going sour in 2008. Ireland's government _ uncomfortably close to many of the country's real estate barons _ tried to discourage investors from fleeing Ireland's six banks by issuing a blanket guarantee that instead has left taxpayers on the hook for all their losses.
Last year, as Ireland found itself unable to fund a deficit ballooning because of the bank bailout bill, the nation was forced to negotiate a euro67.5 billion ($95 billion) bailout credit line from the European Union and the International Monetary Fund.
At the time, that loan was designed to cope with Ireland's cash needs through 2014. But if the bank rescue costs soar as expected, analysts warn the EU-IMF loans won't be enough.
Ireland's weak growth prospects, hobbled by years of spending cuts and tax hikes, are already making it hard to see any solution that doesn't involve eventual default. The new government led by Prime Minister Enda Kenny has warned that foreign bondholders in Irish banks may have to start sharing the losses.
The Irish Central Bank notes that the majority of Ireland's outstanding bank bonds are no longer covered by the state guarantee. About euro21 billion ($30 billion) is guaranteed and must be repaid when the bonds mature, but euro40 billion ($55 billion) more is unguaranteed, unsecured or both _ and could become targets of a negotiated partial default.
But if Ireland went down this route, it would require EU support because of Ireland's membership in the 17-nation eurozone _ and would send shockwaves through financial systems worldwide. The biggest holders of Irish bank bonds are British, German and U.S. banks, which until now have suffered virtually no losses from Irish debt restructuring.
Still, the soaring rising bailout bill may leave Ireland with no choice. The estimated euro80 billion figure to save the banks represents nearly euro18,000 ($25,000) for every man, woman and child in the Republic of Ireland _ or euro45,000 ($63,000) for every worker paying income tax.
Many Irish have given up hope that their country can cope.
"Our banks are beyond saving. The bills are beyond paying," said Emer Fennell, a retired Dublin Airport official, with a resigned shake of the head. "I wish we could just take them (Ireland's bankers) all out in the back garden, shoot 'em dead, and leave them in an unmarked grave."
Beyond the potential euro80 billion figure, Ireland's banks also owe more than euro180 billion ($250 billion) in short-term loans from the European Central Bank and Irish Central Bank. Those funds need to be renewed every two weeks, and no Irish bank could function today without them.
As tensions rose ahead of the test results, Irish Life & Permanent _ the only bank so far to avoid state intervention _ halted trading in its shares after a record 45 percent plunge fueled by rumors of imminent nationalization.
Irish media reports say the bank needs at least euro2 billion ($2.8 billion) but, following Tuesday's nosedive, it has a market value of just euro110 million ($155 million) and cannot raise even a fraction of that cash.
Shares in Bank of Ireland, which is already 36 percent owned by the government, fell 7 percent in expectation that its stress test would force the bank to surrender to majority state control.
Over the past year, foreign banks stopped loaning entirely to Irish banks, and the government also withdrew from the bond market in September citing punitive interest rates. Two months later, Ireland negotiated the bailout from EU and IMF donors, some euro35 billion of which was earmarked to help its banks.
Ireland expects to draw down around euro40 billion ($55 billion) of those funds by early 2012 to cover both the banks and its own national deficits. But it could need even more, even sooner, if the bank stress tests prove correct.
The European Central Bank is expected soon to produce a new loan package specially designed for Ireland involving medium-term loans in excess of euro60 billion ($85 billion) that would be designed to replace most short-term funding for Ireland.
Irish Finance Minister Michael Noonan said he hopes to advance that plan at an EU finance ministers meeting in Hungary next week.
Ireland has mounted two previous rounds of tests to find the bottom of its debt crisis. But Thursday's figures will be the first assessing the full potential impact of failing residential mortgages. Hundreds of thousands of Irish are trapped in negative equity and, with unemployment at a 17-year high of 14.7 percent, tens of thousands are at risk of foreclosure.
Ireland has spent three years fighting, and failing, to keep its six banks afloat and out of state hands. The first two to be fully nationalized, Anglo Irish and Irish Nationwide, are already being dismantled and sustained only as repositories for toxic property-based debts.
A third small nationalized bank, ESB, was expected to be sold to a U.S. consortium led by Wilbur Ross, a U.S. billionaire who specializes in buying distressed businesses. But the agency responsible for managing Ireland's national debt announced Wednesday that Ross' bid had been rejected because it "was not sufficiently commercially attractive."
The ESB, which has received euro875 million ($1.2 billion) in state aid to stay afloat, now could be broken up and its parts merged into one or more of Ireland's three survivors: Allied Irish, Bank of Ireland, and Irish Life & Permanent.
Until now, only Irish Life & Permanent has avoided the process of creeping nationalization. Unlike the others, IL&P avoided loaning tens of billions to the country's hard-gambling property barons, most of whom are now bankrupt or in overseas havens. Its insurance and pensions arm, Irish Life, is a strong-performing asset.
But Thursday's test is expected to show that IL&P is massively exposed to Ireland's sinking mortgage market with potentially tens of thousands of defaults on the horizon. The company's retail banking arm, Permanent TSB, is Ireland's biggest mortgage provider. Its loans are twice the size of its deposits.