Ireland's central bank has put a 34 billion euro (£29bn) price on bailing out stricken Anglo Irish Bank under a worst case scenario and said Allied Irish Banks needs to raise an additional three billion euros by the end of the year.
The government will announce plans to recapitalise Allied Irish Banks, the central bank said. Dublin already has a near 19 per cent stake in the lender.
"Today's announcements take the Irish banking system closer to a final resolution of its restructuring, which is a prerequisite for sustained economic recovery," Central Bank Governor Patrick Honohan said in statement.
Under its base case scenario, the central bank said the Anglo Irish bill was expected to be 29.3bn euros.
The euro slipped in the wake of the announcement about the nationalised lender.
The central bank said the additional cost of recapitalising Anglo Irish Bank and Allied Irish Banks confirmed the need for a reprogramming of the government's budget plans.
"The additional budgetary costs – and in particular the higher debt-to-GDP ratio that is implied – confirm the need for a reprogramming of the budgetary profile, though it is important to recognise that the bulk of this reprogramming need arises from other sources," Honohan said.
Prime Minister Brian Cowen's government has a wafer-thin majority in parliament and faces a discontented electorate, making it politically difficult to toughen up a budget in December that is already expected to be harsh.
Ireland has already injected nearly 23 billion euros into Anglo Irish Bank.
Irish borrowing costs have climbed to euro lifetime highs and triggered jitters across Europe over as investors craved some certainty about the bill to wind down Anglo Irish.
Cowen was hailed internationally for taking early tough action to tackle Ireland's towering deficit but that goodwill has disappeared as the burden of dealing with the nationalised lender escalated.
European Union officials are pressing Dublin to come up with a detailed plan for getting its fiscal gap – the worst in the bloc – under control by 2014. Euro zone finance ministers are expected to discuss the situation when they meet in Brussels later in the day.
Bond traders have said a figure of up to 35bn had been priced into the market after ratings agency S&P said the bill could be that high.
Ireland has insisted the Anglo bill, which is expected to propel government debt to over 100 per cent of GDP, will be manageable because it will be spread out over at least a decade.
City A.M. Reporter