DUBLIN Ireland is set to take a majority stake in top lender Bank of Ireland as part of a massive international bailout that will effectively give the state full ownership of the country's two other biggest banks.
The European Union and International Monetary Fund (IMF) have agreed a bailout of Ireland to shore up its banks and give them access to cheaper state funding.
The loan was expected to be up to 85 billion euros ($114 billion) and billions of that could be used immediately to recapitalize the banks, but most will be a backstop in case they need more in the future and to ease funding strains.
Irish officials have said they want to overcapitalize banks and were expected to require they hold a core Tier 1 capital ratio of about 12 percent, giving a bigger cushion than most international rivals to withstand future shocks.
Pumping in necessary capital will likely to mean the government could fully nationalize Allied Irish Banks and take a majority stake in Bank of Ireland in which it currently has a 36 percent stake.
Anglo Irish Bank has already been nationalized after needing billions of euros to cover losses on commercial property loans.
Lifting the core Tier 1 ratio of Bank of Ireland, AIB and Anglo Irish Bank would cost almost 8 billion euros, Reuters calculations showed. About 5.6 billion euros could be needed by AIB, 1.6 billion for Bank of Ireland and 500 million for Anglo Irish Bank.
A plunge in share prices this week increases the dilution for shareholders and the size of the government stake.
Bank of Ireland shares were down 12 percent at 25.5 cents by 0830 GMT, cutting its market value to under 2 billion euros. AIB shares were down 17 percent, valuing it at less than 500 million euros. Both have lost about 40 percent of their value this week.
Extra cash could be pumped into Ireland's ailing banks as soon as this weekend, the Irish Independent reported on Wednesday.
As well as providing capital, the government wants to shrink banks' loan books to ease a strain on funding strain which has intensified in the past six months amid an exodus of deposits, adding to Irish lenders' dependence on ECB funding, which has risen to 130 billion euros.
Ireland could also impose a levy on banks as a term of the bailout and to ease a deadlock over the country's low corporation tax, The Irish Times reported.
AIB could also be told to restart a sale of its British business, after halting the process last week when failing to find a buyer.
The banking crisis has rocked Ireland and stretched its finances. The deeply unpopular government was due to explain on Wednesday how it planned to save 15 billion euros over the next four years. The IMF and EU bailout depends on the austerity plan and a later budget going through.
(Additional reporting by Carmel Crimmins; Editing by Dan Lalor)
($1 = 0.7466 euro)