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Irish prepare to learn full cost of banking crisis

By Shawn Pogatchnik

Associated Press

Published: Thursday, March 31 2011 5:25 a.m. MDT

FILE - This is a Thursday, Nov. 4 2010 file photo of a Bank of Ireland building in Dublin, Ireland. Bank of Ireland shares fell 7 percent Wednesday March 30, 2011.

Peter Morrison, File, Associated Press

DUBLIN — Ireland prepared to learn the full cost of its banking crisis on Thursday when the results of stress tests were expected to reveal that four banks need billions more in aid, likely giving the government extra ammunition in its campaign to force some of the losses on international investors.

As the results loomed, market tensions were at a high, forcing the suspension of trading in the shares of Bank of Ireland and Allied Irish Banks. Irish Life & Permanent and the Educational Building Society were also being tested.

A senior Irish banker, Mike Aynsley, said he expected the tests to conclude that the four lenders would need another €18 billion to €25 billion ($25 billion to $35 billion) to strengthen them against any future shocks.

That figure would come on top of the €46 billion ($65 billion) that Ireland, a nation of just 1.8 million income-tax payers, has already paid to prevent the outright collapse of five banks since 2008. Ireland has repeatedly been forced to raise its worst-case estimates of bank losses as its property market sinks deeper, forcing many of construction barons into bankruptcy.

This time, the newly elected government of Prime Minister Enda Kenny appears poised to break with its predecessor and demand that the European Union, European Central Bank and International Monetary Fund support a solution that would pass some of the losses on the banks' senior bondholders.

EU and IMF chiefs, who provided Ireland a potential €67.5 billion ($95 billion) credit line in November to fund its bank bailouts and wider deficits, at that time ruled out forcing burden-sharing on Ireland's foreign — chiefly British, German and American — bondholders. New EU bailout rules due to come into force in 2013 would require banks, hedge funds and others who lend money to European banks to take losses in event of a bailout.

Following the test results by the Irish Central Bank, Irish Finance Minister Michael Noonan is expected to unveil radical plans to slash and merge Ireland's banks into potentially just two survivors: Bank of Ireland and Allied Irish Banks.

Before trading opened Thursday, the Irish Stock Exchange and the Central Bank announced a 24-hour suspension in dealing the shares of both banks. They said the temporary withdrawal was designed to prevent "a disorderly market" fanned by potentially inaccurate rumors.

Trading was already suspended Wednesday in Ireland's other publicly listed bank, Irish Life & Permanent. The shares of all three banks were expected to resume trade Friday.

Ireland plunged into a financial morass after its banks spent a decade gorging themselves on real estate loans that started going sour in 2008. Ireland's previous government — uncomfortably close to many of the country's real estate barons — tried to discourage investors from fleeing the 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 an EU-IMF bailout designed to cover Ireland's cash needs through 2014.

Economists warn that Ireland's weak growth prospects, hobbled by years of spending cuts and tax hikes, make it hard to see any solution that doesn't involve eventual default.

Irish economics commentator David McWilliams said the time was long overdue for the banking losses in Ireland, Greece and elsewhere to be borne by the European banks that loaned them the money.

"The markets know the European Union is only buying time," said McWilliams, an ardent campaigner for Ireland to default on banking debts. "The banks of Germany and France that loaned €700 billion to the peripheral countries of Europe are going to have to take the pain of the irrationality of their own business decisions over the last four years."

Potentially setting the stage for debt restructuring — when lenders agree to take losses or slower repayments at lower interest rates — the Irish Central Bank last month reported that the majority of Ireland's outstanding bank bonds are no longer covered by the state guarantee.

It said about €21 billion ($30 billion) is guaranteed and must be repaid when the bonds mature, but €40 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.

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