Ireland to invest $9 billion into top banks

By Andras Gergely and Jonathan Saul

DUBLIN (Reuters) - The Irish government beefed up its bank bailout package on Wednesday with a pledge to inject 7 billion euros ($9.05 billion) into the top two lenders in return for guarantees on lending, executive pay and mortgage arrears.

Dublin is hoping the additional capital injections, nearly double the previous package, will restore credibility to its financial system and help revive a rapidly shrinking economy, but a scandal surrounding deposits at nationalized Anglo Irish Bank has rattled its efforts.

"The government has decided on a comprehensive recapitalization package which will reinforce the stability of our financial system," Finance Minister Brian Lenihan told a news conference.

Under the scheme, the government will invest 3.5 billion euros in Core Tier 1 capital into each of Bank of Ireland (BKIR.I) and Allied Irish Banks (ALBK.I) in return for preference shares that give the government 25 percent voting rights over board appointments and an annual dividend of 8 percent.

The preference shares have warrants that give the government the right to acquire a 25 percent stake in each of the banks after five years.

But Lenihan said if either bank redeems up to 1.5 billion euros of preference shares from privately sourced capital this year then the government would only be able to acquire a 15 percent stake.

"The bank does not intend to take control of these banks," he said. "We want to incentivise the banks to fund themselves with private capital."

Lenihan did not unveil any insurance scheme or "bad bank" plan for the banks' soured debts but said the government would examine proposals for the reduction of risks associated with property lending.

The government also said it would examine the possibility of altering its existing guarantee scheme for deposits at six major lenders to support longer-term bond issues by those lenders, including Allied Irish Bank, Bank of Ireland and bancassurer Irish Life & Permanent (IPM.I).

In return for the bailout, Allied Irish Banks and Bank of Ireland have agreed to cut pay to top executives by at least 33 percent and halt bonuses.

The banks have also agreed to increase lending to small businesses and first time home buyers and will establish a 12 percent moratorium on repossessing homes.

Earlier, Lenihan admitted that there had been huge reputational damage done to Ireland over concern Anglo Irish had used temporary deposits from Irish Life & Permanent, put at up to 7 billion euros by a source, to artificially shore up its deposit base ahead of its financial year-end on September 30.

The deposits controversy follows a directors' loan scandal at Anglo Irish that precipitated its nationalization and undermines the government's goal of restoring credibility to the banking sector and the wider economy.

"The credibility of the Irish financial system or the Irish economy as a sensible place to go and do business is actually starting to be questioned itself," said Alex Potter, analyst with Collins Stewart in London. "I find that quite horrifying."

(Editing by David Cowell, Phil Berlowitz)