The Government plans to inject €8 billion into the country's top two banks and is in talks to underwrite some of the lenders' potential bad debts, a source close to the talks said today.
The recapitalisation plan, which is set to be unveiled later this week, doubles the amount Dublin had originally said it would invest in Allied Irish Banks (AIB) and Bank of Ireland.
"There is a small bit of tinkering yet to be done," said the source, who declined to be named because of the sensitivity of the talks. The Department of Finance, AIB and Bank of Ireland all declined to comment.
The source said the Government wanted to divide the €8 billion equally between the two banks but AIB, which has previously signalled little appetite for State funding, is reluctant to accept €4 billion .
In December, the Government said it would invest €2 billion in each of AIB and Bank of Ireland via preference shares, giving it 25 per cent voting rights over "key issues".
It also said it would underwrite their plans to raise an additional €1 billion each.
With the new plan, it was not clear what the breakdown will be between preference shares and ordinary shares.
Investors, rattled by the nationalisation of Anglo Irish Bank, welcomed the prospect of an enlarged capital injection but they were anxious to see the cost of the plan to the banks and the potential dilution effect.
"It's better than a rights issue or being nationalised, it's the best option that could be expected," said one Dublin-based trader.
Shares in AIB rose over 6 per cent to €1.30 but Bank of Ireland remained in the red, down 1.54 per cent at 64 cents.
The Government is trying to squeeze €2 billion in public spending cuts in talks with unions and employer groups this week and Prime Minister Brian Cowen has set a deadline tomorrow to seal a deal.
Goodbody Stockbrokers said that while quick Government help for the banks was welcome, it was even more urgent for the government to strike a convincing deal on cutting the ballooning budget deficit.
"The market will firstly need to gain comfort regarding whether the sovereign itself is making inroads in addressing its deteriorating fiscal position," Goodbody analyst Eamonn Hughes said.
Moody's credit rating agency warned Ireland on Friday it was in danger of losing its prized AAA sovereign debt rating, echoing a similar warning from Standard & Poor's last month.
Reuters