Cabinet discusses spending cuts, recapitalisation plan

The Cabinet met today to discuss how to impose €2 billion in public spending cuts following a breakdown in talks with the social partners earlier this morning and to refine its plan to recapitalise the State's two largest banks.

The meeting comes amid the worst economic crisis in more than two decades and with the release of Exchequer returns for January expected to provide further detail on the extent of the financial problems facing the country.

The extent of the increase in unemployment in recent weeks is expected to be clarified by the release of Live Register figures tomorrow.

The Taoiseach and his ministers were also due to discuss a new recapitalisation scheme to inject more public cash into Bank of Ireland and AIB.

Talks on the multibillion recapitalisation centre on how the injection of money would be structured and what the State will get in return.

A total capital injection of up to €8 billion is being discussed, split equally between the banks, but this could be reduced if a scheme could be agreed where the banks are insured against some of their projected losses from bad loans.

Under the first recapitalisation proposal the Government planned to inject €2 billion into AIB and Bank of Ireland using preference shares in return for a 25 per cent in each bank.

However, falls in the share prices of both banks have restricted their ability to raise additional capital on the open market and the amount to be injected in each is likely to double.

According to an Irish Times report this morning sources believe AIB was “dragging its heels” in the negotiations, seeking to maximise the position of its existing shareholders.

At 2pm shares in AIB were 11.5 per cent lower at €1.17 while Bank of Ireland shares were 10 per cent lower at 57 cent. The Iseq overall was marginally lower.