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Bank of Ireland Slides on Majority State Stake Concern

Bank of Ireland Plc, Ireland’s largest bank, plunged for a third day as the government prepared to inject more capital, a step that may make it the fifth lender to fall under majority state control in less than two years.

Bank of Ireland fell 11 percent to 22.6 cents in Dublin, extending its 38 percent drop over the past two days. Allied Irish Banks Plc, the nation’s second-largest lender, rose 3 percent to 34 cents, reversing earlier losses. Irish Life & Permanent Group Holdings Plc, the only domestic bank to avoid a bailout, tumbled 16 percent to 63 cents.

Ireland’s government will seek to raise the core Tier 1 capital levels of its banks to between 10.5 percent and 12 percent, up from the central bank’s 8 percent target, two people familiar with the situation said yesterday. The government’s stake in Bank of Ireland may rise to more than 50 percent after the latest round of capital injections, said the people, who declined to be identified as the plan hasn’t been completed.

Bank of Ireland would need about 3.2 billion euros ($4.3 billion) of additional capital to bring its core Tier 1 ratio to 12 percent, Emer Lang, an analyst with Dublin-based securities firm Davy, wrote in a note to clients today. “Assuming the entire incremental requirement of 3.2 billion euros had to come from government, we estimate its stake would rise to 79 percent,” he said.

Escalating Costs

Ireland’s banking crisis forced the government to seek a bailout from the European Union and International Monetary Fund on Nov. 21, after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led it to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at as much as 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue. This figure is now set to increase again.

EU policy makers must show “meaningful actions” to head off a “spreading disaster” in the euro region, Pacific Investment Management Co. chief executive officer Mohamed El-Erian wrote in an article for the Financial Times today.

The cost of protecting against defaults on senior notes of European banks is soaring on speculation bondholders will be forced to take losses as governments try to share the burden of taxpayer-funded bailouts. The Markit iTraxx Financial Index of credit-default swaps on senior debt rose 12.5 basis points, or 0.125 percentage point, to 163.5 basis points, the biggest increase since June. Contracts on Portugal’s Banco Espirito Santo SA are at a record, and Spain’s Banco Santander SA are at the highest level in five months today.

‘Stress Test Irrelevant’

“The Irish crisis has basically made the summer banking stress test irrelevant: none of the Irish banks failed it,” Societe Generale SA analysts led by Vincent Chaigneau wrote in a report to clients today. “On that basis, investors are reluctant to trust claims that Portugal’s and Spain’s banks are as “different” as politicians want us to believe.”

Bank of Ireland completed a 2.9 billion-euro fundraising in June that gave the government a 36 percent stake in the lender. The state is also preparing to take a majority holding in Allied Irish by the end of the year. The government may end up owning 99.9 percent of Allied Irish, Dublin-based RTE said on Nov. 23.

‘Banking Crisis’

Ireland is getting “uncomfortably close to a devastating banking crisis that would derail growth, employment and wealth creation for a whole generation,” El-Erian wrote in the Financial Times. Allied Irish said Nov. 19 that deposits have dropped by about 13 billion euros -- or 17 percent -- since the start of the year.

The country’s bailout may total about 85 billion euros. Prime Minister Brian Cowen told parliament in Dublin today that a package of that size is being discussed, though no final decision has been taken.

Ireland’s banks face “severe” restructuring requirements linked to the bailout package, European Commission spokesman Amadeu Altafaj said separately today.

Standard & Poor’s cut Ireland’s debt rating late yesterday by two steps to A, with a “negative” outlook, as the nation’s bailout of its banking system is set to boost the government’s borrowing needs. That downgrade could have a negative impact on the creditworthiness of the four rated domestically owned Irish banks, the company said today.

S&P Statement

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said. S&P said it expects a bailout package to “instill confidence in financial sector liquidity.”

Irish lenders have become increasingly reliant on emergency European Central Bank funding after being frozen out of wholesale markets. The amount of ECB loans to the country’s banks rose 7.3 percent to 130 billion euros in October from the previous month, Ireland’s Central Bank said on Nov. 1. The data include both international and domestic banks operating in Ireland.

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