Bank of Ireland shares jump on independence hopes
Bank of Ireland shares have jumped 41% on hopes the government will not have to take a majority stake in the firm.
However, Irish Life and Permanent plunged 54%, a day after the results of the stress test on the Irish banking system were announced.
The tests found the country's banks will need an extra 24bn euros (£21.2bn) to survive the financial crisis.
Bank of Ireland said it would be able to meet its capital requirements and thus remain independent.
Its shares closed at 31 euro cents. Irish Life closed at 17 euro cents.
"It seems very likely that the government will end up owning a majority stake in Irish Life & Permanent," said Emer Lang, banking analyst with the stockbrokers Davy in Dublin.
Bank of Ireland has been ordered to raise 5.2bn euros ($7.4bn; £4.6bn) by early summer to meet capital requirements. The bank said it would do so.
"It has potential to raise some of that through further debt management," said Ms Lang, adding that some of the rest might come from existing shareholders, thus minimising the government's involvement.
The Irish Republic's government currently owns a 36% stake in Bank of Ireland. Investors hope it will keep its stake below 50%.
"The Bank of Ireland has at least a fighting chance of maintaining its independence," said Ms Lang.
"It has three months to keep itself out of the government's hands."
Irish Life & Permanent has to raise 4bn euros. Emer Lang said it should be able to raise 1.1bn euros from its life business and from debt management, but that it would struggle to raise the remaining 2.9bn.
Shares in Allied Irish Banks initially fell 15%, but soon bounced back and closed up 11% at 21 cents.
The bank is already majority-owned by the government, and the state's stake might be raised, she said.
Allied Irish Banks is expected to be merged with building society EBS as part of a government plan to reduce the number of banks in the country.
Bank of Ireland and Allied Irish Banks are expected to become the two main "pillar banks" on which the banking system will rest in the future.
It was announced last month that the heavily-indebted Anglo Irish Bank would be merged with the Irish Nationwide Building Society and its assets auctioned off.
Ratings agency Standard & Poor's said the latest round of tests were robust, despite criticism that the scenarios included in the assessment were no worse than the current economic situation facing the Republic.
It did downgrade Irish government debt to below A rating, however, but by a smaller amount than had been expected.
"It's as positive as a downgrade can be," said Eoin Fahy, economist at Kleinwort Benson Investors.
S&P said it expected the Irish economy to gradually recover.
"We are of the opinion that the sharp contraction in Ireland's nominal GDP... since 2008 has reached an end, and that the Irish economy is now set to gradually recover," the agency said in a statement.
Rival agency Fitch, however, said there was "significant uncertainty" surrounding the outlook for growth this year following a greater-than-expected contraction of the economy at the end of last year.
"The weaker GDP baseline, as well as increased bank recapitalisation costs announced on 31 March 2011, mean that the government debt-to-GDP ratio is likely to rise significantly higher than Fitch's projection of a peak of 103% of GDP made in December 2010," it said.
Most of the cost involved in restructuring the Irish banking system will be borne by the taxpayer.
Finance Minister Michael Noonan had tried to get German, US and UK investors in Irish bank bonds to share in the burden, but his plan was vetoed by the European Central Bank (ECB).
The ECB was concerned large investors might panic and thus make it harder for bond issuers to raise funds, thus causing a damaging credit crunch.
This would also mean Irish banks might find it difficult to raise funds in the future by issuing bonds.
"It would inhibit their capacity to get funds in the market in two and a half, three years time, if the people they are going to be seeking the funds from have shared in the burden - by burning the bondholders - to use the expression," Mr Noonan said.