Ireland's government would be able to force junior bank bondholders to share losses to protect financial stability under legislation published Tuesday.

The government may act if "necessary for preserving or restoring the financial position of the relevant institution," according to the Credit Institutions (Stabilization) Bill, published on the Irish Parliament's website.

Lawmakers are to vote Wednesday on the plan, which also gives ministers power to veto bonuses at bailed-out lenders.

Under the rules, the finance ministry and central bank would have to review an individual bank's debt, the extent of government financial support it received and the chances that junior debt holders would be repaid if the lender were wound up.

The government would then be able to seek a court order forcing bondholders to share the cost of rescuing the bank.

The bill would let the government "take the actions required to bring about a domestic retail banking system that is proportionate to and focused on the Irish economy," Finance Minister Brian Lenihan said.

"The banking system must play its role in providing the credit to the real economy to support our recovery," Lenihan added in the statement.

Ireland's government pledged an "intensification" of the restructuring of its banks, including asset sales, as part of an 85 billion-euro ($114 billion) international aid package agreed to Nov. 28.

Under the bailout from the International Monetary Fund and European Union, the government may force subordinated bondholders in Irish banks to share the cost of bailing out the financial system.

The law gives the government power to alter bondholders' rights, including those regarding the payment of interest, repayment of principal, events of default and the timing of the payback of debt, according to an explanatory note published on the finance ministry's website.

Affected subordinated bondholders may also be given a stake in a lender, it said.

The powers will expire at the end of 2012, the ministry said.

"In terms of forcing losses on subordinated bondholders, the government is distinguishing between institutions in terms of how much state support they received," Ciaran Callaghan, an analyst at Dublin-based NCB Stockbrokers, said by telephone.

The law may let the government "take a more punitive position" in Allied Irish Bank PLC's restructuring than in the case of Bank of Ireland PLC, he said.

Allied Irish, which is 19% state-owned, must raise $13 billion by March.

The bill lets the government inject capital into Allied Irish before yearend to ensure that it meets regulatory requirements, the ministry said.

By buying back and exchanging their debt at prices lower than face value, lenders can book a gain.

The bill also allows the minister to order the transfer of assets and liabilities of lenders to help restructure the industry.

Central Bank Governor Patrick Honohan said Nov. 29 that the deposits of Anglo Irish Bank Corp. and Irish Nationwide Building Society, both controlled by the government, will be transferred to other lenders.

The government will also be able to veto bonuses at banks that get taxpayer money, according to the legislation.

Allied Irish dropped plans Monday to pay $52 million in bonuses to employees in its markets unit after Lenihan threatened to withdraw government support for the lender.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.