Irish banks face D-Day on Tuesday when the government reveals its plans for additional recapitalization and the discount on the first tranche of loans being transferred to the nation's "bad bank."
Ireland's banks were particularly hard hit by the global financial crisis and by a collapse in the property market. They had made big loans to property developers, and many of these loans are unlikely to be repaid.
Bank shares plunged Monday over investors' fears that at least one of the country's two major publicly listed banks will eventually join Anglo Irish Bank Corp. in state ownership.
Also Tuesday, the National Treasury Management Agency is to detail the discounts or "haircut" on the first tranche of loans being transferred to the National Asset Management Agency, or Nama, a "bad bank." Analysts see the discount as likely to be 35% to 40% — more than the 30% previously flagged by the government.
At Monday's close, Allied Irish Banks PLC slumped 20% in Dublin trading as economists predicted the state will end up with a 70% stake, and Bank of Ireland PLC fell 10%.
Finance Minister Brian Lenihan will tell the Irish Parliament after Tuesday's market close how much more Allied Irish and Bank of Ireland will need to stabilize them in the wake of the bad debts.
Nama is based on the Swedish bad-bank model. In the early 1990s, Sweden transferred bad loans to a "bad bank," allowed some banks to go into liquidation and nationalized others.
Allied Irish Banks has said it is considering all capital-raising options. It also said Monday that it is in talks with the financial regulator on capital requirements.
Bank of Ireland said in February it was exploring "a range of options" to raise capital.
The government has already recapitalized Allied Irish Banks and Bank of Ireland with $4.7 billion each, in return for, in effect, a 25% stake in each bank — which it can convert into ordinary shares — but it has so far resisted nationalizing the banks.
Last month, the state also took an additional 15.7% stake in Bank of Ireland.
On Wednesday, Bank of Ireland will announce its results for the nine months to Dec. 31, 2009, and the nationalized Anglo Irish Bank Corp. will report 2009 results.