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Ireland Bank Crisis: 'Worst Fears Surpassed' As Banks Need An Additional $42.7 Billion

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U.S. taxpayers can find some solace in the fact that there is one country with banking problems worse than our own.

Ireland's banks need another $42.7 billion in capital, Bloomberg reports today. Government estimates of how much Irish banks would need to write down their bad loans were apparently too rosy. "Our worst fears have been surpassed," Finance Minister Brian Lenihan told Bloomberg. "The detailed information that has emerged from the banks in the course of the process is truly shocking."

Here's more from the AP:

Ireland's government said Tuesday it will help banks raise nearly euro 22 billion ($30 billion), much of it from taxpayers, to meet stiff new capital requirements that are part of a plan to resolve the nation's banking crisis.

Finance Minister Brian Lenihan also announced terms for the first tranche of transfers of bad loans, around euro16 billion ($21.5 billion) worth, to the new "bad bank" _ the National Asset Management Agency.

Discounts, or "haircuts," on the valuation of those loans - ranging from 35 percent for Bank of Ireland to 58 percent for Irish National Building Society - will force the banks to write down billions of losses, Lenihan said.

"The banks will now have to recognize these losses upfront," Lenihan said.

Bank of Ireland and Allied Irish Bank are both due to report their 2009 earnings this week.

"We now have a clear path to saving the banking system," Lenihan said.

The state already has a 16 percent stake in Bank of Ireland and a 25 percent indirect stake in Allied Irish, and it was unclear how large the stakes might grow.

Before Lenihan revealed his plans to the Dail, the Irish parliament, the Financial Regulator announced that by the end of the year, banks must reach a level of 8 percent tier 1 capital, of which 7 percent must be equity.

The 8 percent target matches the rule in Britain, but it requires only 4 percent equity capital.

The government's plans are subject to approval by the European Commission, Lenihan said.

Bank of Ireland must raise euro2.7 billion, and might be able to raise it privately, Lenihan said. The state will convert preference shares to ordinary shares, but he did not indicate how large a stake the government would hold in the bank.

Allied Irish Bank, which needs euro 7.4 billion in new capital, was ordered to sell assets in the U.S., where it offers services to nonprofit institutions; in Britain where it offers a full range of banking services, and in Poland, where it owns Bank Zachodni WBK.

The state will put euro 8.3 billion into Anglo Irish Bank, in the form of long-term promissory notes, but another euro10 billion may be required, Lenihan said.

Winding up Anglo Irish, which is already fully nationalized, would cost up to euro70 billion and is not an option, Lenihan said.

"I understand why many want us to close this bank. I understand the impulse to obliterate it from the system," Lenihan said.

However, he said Anglo Irish might be able to return to private ownership in five to seven years.

The state will inject euro 2.7 billion into Irish Nationwide Building Society, and euro100 million into EBS Building Society.

The euro16 billion in bad loans being transferred represents about a fifth of the total, Lenihan said.

Anlgo Irish has about euro 36 billion worth of eligible bad loans, Allied Irish as euro23 billion and Bank of Ireland euro 12 billion.

Allied Irish shares fell 8.8 percent on Tuesday and Bank of Ireland shares were down 2.8 percent.

Ireland's banking crisis has been marked by resignations of several senior executives, state investments of billions to shore up the industry and, earlier this month, the arrest of Anglo Irish Banks' former chief executive, Sean FitzPatrick, and former finance director William McAteer. Both were quickly released and the investigation continues.

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