IRELAND yesterday confirmed that there is a €24bn (£21bn) black hole in its banks’ funding and outlined a radical overhaul of the sector that will see five main banks consolidated into two.

The plan, announced after markets closed, effectively nationalises Ireland’s entire banking system and brings the cost of state support to a stunning €96bn in total.

But finance minister Michael Noonan told the Irish parliament he would take “actions to significantly reduce the cost to the taxpayer” of the latest capital injection, including burden-sharing by banks’ creditors.

But the much-anticipated stress test results were not accompanied by an announcement on an official ECB credit line to wean the banks off ad hoc funding from Ireland’s Central Bank. Observers are expecting the ECB to take over supplying liquidity to the banks to ensure Dublin does not have to draw down more than the €35bn in bailout funds allocated to fixing its banks.

Noonan said the industry restructuring would rearrange the banks into “two pillars”. The first will see Bank of Ireland, which needs to raise €5.2bn, split off its “non-core” assets and downsize, while Allied Irish Banks, which needs €13.3bn in additional capital, and EBS, which needs €1.5bn, will merge to firm the second. Combined, the two new banks will have to offload €53bn’s worth of assets by 2013.

Other nationalised banks Anglo Irish and Irish Nationwide Building Society will be “wound down over a reasonable period of time”. Noonan said the plan was “essential for our economy” in order to “break the bonds with our toxic banking past”.

The scale of the funding gap met economists’ expectations, but markets are still fearful of an Irish default, with yields on Dublin’s five-year debt climbing above an eye-watering 11 per cent.

Meanwhile, Portuguese deficit figures for 2010 came in worse than expected at 8.6 per cent of GDP versus the 7.3 per cent target. Portuguese finance minister Texeira dos Santos blamed the deficit figure on a change in calculations and added that the government does not have the legal power to request any kind of rescue until after elections in early June.