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Irish bank stress tests reveal 24-billion-euro black hole

Ireland's central bank has revealed that four of the country's major lenders need billions more euros to ensure survival in another economic downturn. Dublin may be forced to effectively nationalize its banking sector.

Pedestrians walks past a name plaque for the Bank of Ireland

The Irish bank sector is facing a major shake-up

The Central Bank of Ireland revealed on Thursday that the country's main lenders need an additional 24 billion euros ($34 billion) to avoid the risk of collapse in the event of a further economic downturn.

Three banks and a building society underwent the stress tests as a condition for Ireland's 85 billion euro bailout from the EU and International Monetary Fund that was agreed last November.

Allied Irish Banks headquarters

Allied Irish Banks is one of four lenders that underwent the stress tests

Ireland's largest lender, the Bank of Ireland requires 5.2 billion euros, the second largest Allied Irish Banks needs 13.3 billion and the nationalized Educational Building Society is short by 1.5 billion. Irish Life and Permanent needs 4 billion euros. Trading in the bank shares was suspended ahead of the announcement to avoid market volatility.

The results mean that Dublin has been forced to come up with a plan for a "credible banking structure."

Plans for new banking landscape

The government has already announced "a radical restructuring" and scaling down of the banking system, with "two new strong universal pillar banks" to be established.

Finance Minister Michael Noonan said the measures "will help instill confidence in our economy."

The Bank of Ireland is to be one of the core banks and is set to shed 30 billion euros in non-essential assets. Allied Irish Banks and the Educational Building Society will form the second core bank, which will be fully state owned.

The tests had been the most demanding ever carried out, Noonan said, and had been "fully open and transparent."

View of O'Connell Street, Dublin

The tests assume a major collapse in property prices

The stress tests entailed simultaneously applying a variety of adverse economic scenarios to the banks to see how they would fare.

Gloomy property outlook envisaged

The conditions, deemed likely by some analysts to be realized, assume that Irish residential property prices would collapse by 62 percent between 2007 and 2013. Such a drop has already been seen in some parts of the country, although there are hopes of an upturn within two years.

They also assume an unemployment rate of 14.9 percent; the current rate stands at 14.7 percent.

The Irish government has already injected about 43 billion euros into the banking sector since 2008. Ireland's banks took particularly high losses on "toxic" property investments during the global banking crisis.

The tests were conducted amid rising speculation that Portugal could be the next eurozone country in line for a bailout.

Author: Richard Connor (AFP, AP, Reuters, dpa)

Editor: Susan Houlton

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