Ireland's ailing banks need another euro24 billion ($34 billion) in cash in a move that will leave all of them under state control and facing a complete overhaul, officials announced Thursday in a long-awaited effort to cap a 3-year banking crisis.
The Central Bank of Ireland made that recommendation as it published pessimistic results for stress tests on four banks. The banks, whose losses the government insured early during the financial crisis, caused Ireland to need a bailout in the first place, so their fate is closely tied with that of the wider country.
The tests presumed that the country's real estate market would keep sinking for the next two years and produce tens of thousands of home foreclosures, a problem that is just starting to bite in a country committed to the idea of home ownership for all.
Central Bank Governor Patrick Honohan said all four banks would need enough money to cover mammoth write-offs of dud property loans and to boost their cash reserves to higher standards. He said these cash requirements can't be met by any of the banks, so each will have to receive funding from Ireland's emergency European Union-International Monetary Fund credit line.
The European Commission, European Central Bank and Washington-based IMF in a joint statement praised the Irish plans as "comprehensive" and "a major step toward restoring the Irish banking system to health."
And in a separate statement, the ECB said it now considered the four banks solvent and worthy of uninterrupted flows of short-term liquidity loans until Ireland's banks are restructured and able to borrow on open markets again. It also announced a lowering of lending conditions in the interim.
In recent months that funding, provided in tandem by the ECB and the Irish Central Bank, has soared to more than euro180 billion and raised tensions between Frankfurt and Dublin over when, if ever, Irish banks could be weaned off the funds.
Analysts sounded a skeptical note. They noted that Ireland now has produced three supposedly definitive stress tests on its banks since 2009 claiming to have found the bottom _ only to produce even scarier numbers within months.
"Our initial impression is that the question of whether this is enough will continue to linger," said Marchel Alexandrovich, European financial economist at Jefferies International.
Ireland's 3-week-old government unveiled plans to shrink the country's financial sector through a series of mergers and asset selloffs.
Finance Minister Michael Noonan told parliament that Ireland intended to create "two pillar banks" based on the market leaders, Bank of Ireland and Allied Irish Banks. The other four Irish-owned banks would essentially disappear within the next few years by selling their good bits and transferring their bad to the two market survivors.
Noonan said the inadequacy of Ireland's previous stress tests and other bailout efforts meant that, this time, the new government had no choice but to embrace a financial Doomsday scenario _ and show how Ireland could withstand it.
"The cost is huge. And it's huge because Ireland has very little credibility left," Noonan said in an interview. "So the policy ... is to overcapitalize the banks, to restore confidence and credibility. They're literally being stuffed with capital."
Noonan said this was necessary because "people don't believe Irish statistics anymore."
"They have been given assurances about numbers too many times before that have proven to be incorrect. So now we have had to undergo the most conservative stress tests anywhere in the developed world, and we've had to overdo it in terms of capitalization," he said.
The government plans to take majority control of Irish Life & Permanent, Ireland's biggest provider of private pensions and residential mortgages. Until now, it has been the only bank to avoid the process of creeping nationalization _ but now it's going to be dismantled.
As part of the new plan, Irish Life & Permanent will sell off its profit-making units in pensions and investments in a public flotation. Its most vulnerable unit, retail bank and mortgage provider Permanent TSB, will be merged with one of the two survivors.
Noonan said the fourth and smallest bank targeted by Thursday's stress tests, Educational Building Society, will be merged into Allied Irish. Ireland already wholly owns ESB and has a 93 percent stake in Allied Irish.
The outside consultants who designed the stress tests, New York-based investment managers BlackRock, based their estimates of loan losses and cash needs on an Irish economy that falls deeper into recession over the coming two years. BlackRock based its projections on mortgage defaults, in part, on the housing-market implosion in Las Vegas.
BlackRock's hypothetical Ireland of the near future would suffer mortgage losses of up to euro17 billion, while average house prices would fall 17.4 percent this year and 18.8 percent next year. The economy would shrink 1.6 percent this year.
Honohan stressed he didn't think any of this would actually happen, but Ireland needs to demonstrate it can cope if it does.
The EU and IMF in November offered the government loans, worth up to euro67.5 billion ($95 billion), on condition that the banks be tested again to determine a worst-case scenario for funding. The EU-IMF bailout fund earmarked up to euro35 billion for bolstering the banks, so Thursday's figures come in well below that limit.
Nonetheless, the new figure would take the estimated total cost of Ireland's bank-bailout efforts since 2009 to euro70 billion ($99 billion) _ some euro15,500 ($22,000) for every man, woman and child in Ireland.
Ireland has already put euro46 billion into its banks since 2009, when it began nationalizing them to prevent their collapse _ and took the country to the brink of bankruptcy as a consequence.
The state already owns 36 percent of Bank of Ireland. It also fully nationalized and is shutting down two other banks, Anglo Irish and Irish Nationwide, that were not targets of Thursday's stress tests.
Thursday's plan calls for Allied Irish to receive euro13.3 billion more; Bank of Ireland euro5.2 billion; Irish Life & Permanent euro4 billion; and EBS euro1.5 billion.