THE taxpayer could yet have to find more capital for the banks unless they can raise private funds and/or get rid of loss-making tracker mortgages, the second-largest ratings agency says.
An analysis by Standard & Poor's (S&P) says the Government and the banks could be locked together financially for several years. Things could improve if the EU's European Stability Mechanism (ESM) were to buy the Government's stakes in the banks, or they were sold to foreign investors, which could bring general government debt below 100pc of GDP.
EU leaders pledged last summer to break the damaging loop between bank losses and government debt, but there has been little progress. However, hopes are rising of a deal with the ECB on the €30bn Anglo-Irish (now IBRC) promissory notes.
Such a deal could see S&P change the credit rating outlook for Ireland from "negative" – meaning the next change is likely to be downwards – to "stable", analyst Nigel Greenwood wrote.
"Of perhaps greater significance for many Irish banks, in our opinion, is the possibility that the Government may be able to engineer the transfer of uneconomic tracker residential mortgages from their balance sheets," the analysts say.
However, they warn that the losses to the banks if these mortgages were transferred at their fair value would knock a large hole in the banks' capital.
S&P takes a conservative view of the economic risks to Ireland.
"We see significant risks associated with Ireland's current high deficits and debt burden, and the challenge of complying with the EU/ IMF fiscal adjustment programme still persists," the report says.
"Our projected risk-adjusted capital (RAC) range in the next 18-24 months for AIB and BOI is 3-3.5pc and 3.5-4pc respectively."
Unlike fellow ratings agency Fitch, S&P does not build in further large falls in house prices.
"We assume that house prices in nominal (cash) terms will be about 1pc lower in 2013 than in 2012, and that they could be flat in 2014," it says.
It expects economic output (GDP) to grow by 1.2pc this year, and average 2.5pc over 2014-2016.
Merrion Economics takes a somewhat more optimistic view, forecasting that GDP will rise by 1.6pc this year and 2.8pc in 2014.
Chief economist Alan McQuaid thinks the underlying budget deficit will come in below the target of 7.5pc of GDP, allowing Ireland to successfully exit the bailout programme at the end of the year.