Irish Banks Might Need An Additional $48 Billion Bailout

03/25/2011 09:03 am ET | Updated May 25, 2011

BRUSSELS - European finance ministers will decide on any necessary changes to Ireland's bailout programme after the results next week of stress tests on Irish banks, the president of the European Council said on Thursday.

Any decision would have to wait, Herman Van Rompuy said after chairing a meeting of EU leaders, who met against a backdrop of mounting concerns that Ireland may need more than the 35 billion euros ($49 billion) set aside under an EU/IMF bailout to prop up its banks.

"We need to have those results to evaluate the consequences on the programme," he told reporters, commenting on stress tests to check the health of Irish banks. "Then we can make a decision as soon as possible at the level of the finance ministers."

The European Central Bank, which is supporting Irish banks by lending them money they would normally borrow from peers, wants to gradually withdraw this, but Irish Prime Minister Enda Kenny is seeking support among EU leaders for more leeway.

Earlier this week, Irish Finance Minister Michael Noonan made a similar plea for more flexibility to ECB President Jean-Claude Trichet.

Dublin is also worried that pressure from the ECB could force a firesale of bad Irish loans and exacerbate its problems.

But with bank stress tests still under way and any preliminary findings under wraps, Kenny was unable to soothe concerns about a larger rescue bill.

"I think it's much more important to be absolutely clear about the extent of the liabilities before we make any further discussions or negotiations," Kenny said earlier, as he entered the leaders' meeting.

"From that point of view I have agreed that I will come back ... when the extent of the stress tests are actually known," said the Irish prime minister, who had originally hoped to win concessions on the interest rate charged on bailout loans.

UNANSWERED QUESTIONS

In a draft statement due to be published after the summit, the leaders outline only their ambition to agree on a plan to restructure troubled banks and decide how governments can help them.

They are set to leave many questions unanswered, including how Ireland could be helped further if its existing bailout loans are not enough.

Nor will they agree on the technicalities of how to increase the lending capacity of the European Financial Stability Facility, the current EU scheme to help countries in financial difficulty.

ECB loans outstanding to banks in Ireland hit 117 billion euros ($165 billion) last month, more than a third higher than a year ago. The Irish central bank has also more than quadrupled its lending to the country's banks, to 70 billion euros, over the same period.

The ECB is working on a plan to wean struggling banks in Ireland and elsewhere that remain reliant on its funding. German central bank chief Axel Weber hinted that could be ready by the third quarter of this year.

The Irish government also hopes to hand losses to some senior bondholders in Irish banks, a move many both in Brussels and other European capitals fear could prompt a new investor scare.

Such a move could affect the more than 11 billion euros of bonds issued by Irish banks AIB and Bank of Ireland.

These are not covered by a state guarantee handed out in haste to protect Irish banks, but which saddled the taxpayer with a bill many believe is unmanageable.

But many EU countries oppose such a step. "This would be adventurism and reckless policy making," said one official.

Ireland will have the results of its banking sector stress tests by the end of next week, though it is still not clear how high the bar will be for banks to pass these financial health checks.

The last round of tests were branded useless after Irish banks were given a clean bill of health -- only months before the EU and International Monetary Fund were called to provide a bailout.

(Additional reporting by Marc Jones in Frankfurt, editing by Rex Merrifield/Stephen Nisbet/Ruth Pitchford)

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