The Irish government announced on Sunday a 10 billion euro (US$13 billion) rescue of Ireland’s six main banks.
The money will be used to recapitalize banks by buying their shares and other measures.
“The government has decided either through the National Pensions Reserve Fund or otherwise ... to support, alongside existing shareholders and private investors, a recapitalization program for credit institutions in Ireland of up to 10 billion euros,” the finance ministry said in a statement.
It said the aim was to ensure the long-term sustainability of banks and to help the recession-hit economy by increasing credit flows.
“This initiative will help to foster and encourage the flow of funds to the economy, and limit the impact of financial market difficulties on businesses and individuals,” the ministry said.
Ireland was one of the first countries to respond to the global credit crisis with a two-year unlimited guarantee scheme for banks that involves a contingency liability of 485 billion euros.
The finance ministry said the state’s investment may take the form of preference shares and/or ordinary shares. It could also act as guarantor.
“In principle existing shareholders will be expected to have the right to subscribe for new capital on the same terms as the government,” it said. “A key principle in the operation of such a fund will be to secure the interests of the taxpayers through an appropriate return on, and appropriate terms for, the investment.”
Finance Minister Brian Lenihan had only recently conceded the government might invest in the banks — previously he had said putting public money into the banking system was a “last resort.”
With Irish bank shares tumbling to a fraction of their value, there has been persistent media speculation about various international groups being interested in acquiring stakes.
There has also been talk of a possible consolidation.
The ministry said that in order to fully safeguard the interests of the taxpayer, state investment will be assessed “on a case-by-case basis.”
Ireland was criticized for acting unilaterally in extending its sweeping two-year guarantee to the banks, and the ministry said any state investment “will be undertaken in line with best practice in the EU.”
It noted that recapitalization is recognized by the European Commission as one of the key measures that may be used by to preserve stability and proper functioning of financial markets.
“In current market conditions even fundamentally sound banks may require additional capital to respond to widespread market perception that higher capital ratios are appropriate for the sector internationally,” it said.
Recapitalized banks “may be required to comply with such requirements as to transparency and commercial conduct as the minister sees fit”, it added.
Discussions with the banks are ongoing, the ministry said, and proposals are due by early January. However, it said they are being asked to continue any negotiations about possible private investment.