SHARES in Irish banks went into freefall again yesterday as the market's brutal assessment of Irish sovereign debt spilled over into Irish financial stocks.
Market sources also cited fears about AIB's future as a trigger for the latest banking falls, which had all three big banks down almost 9pc by mid-morning.
The price of subordinated bonds, essentially lower security debts owed by the banks, also plummeted yesterday as investors bet on the likelihood of imminent write-downs.
The damning assessment of Ireland's prospects also spread beyond our own banking sector, with UK financial giant RBS falling 2.7pc as the market punished its €5bn Irish sovereign debt holding (as of June).
On the Irish front, market sources said banks across the board were being punished for the close link between the Irish financial sector and the Irish sovereign.
Substantial debts and assets of Irish banks are secured by state guarantee, while the State also has a 36pc stake in Bank of Ireland and will soon have a 92pc stake in AIB.
"The sovereign and the banks are so closely intertwined, the only way to break the circuit is to bring in foreign ownership," said Goodbody's chief economist Dermot O'Leary, referring to the day's losses.
Bancassurer Irish Life & Permanent (IL&P) was the hardest hit, with its shares closing down more than 9pc at 83c, having touched a low of 82c at 4.30pm.
IL&P's shares have endured massive volatility this week, losing 16pc on Monday before gaining 7pc on Tuesday and shedding another 3pc on Wednesday.
AIB, meanwhile, closed down almost 7pc yesterday, though market sources pointed to very light trading with just 640,000 shares changing hands on the Iseq.
Of greater significance was the collapse in the price of AIB's subordinate debt, with an €869m note due in June 2019 trading at just 47.1pc of its face value, down 5c in the euro over the day.
"The problem is that a precedent has been created with Anglo [which is also state-owned]," said Mr O'Leary. "There's the risk that subordinated bondholders at AIB will be forced to take a hit as well."
Fears about the cost of AIB's bailout, which economist Morgan Kelly recently pegged at up to €26bn, has also been blamed for turning investors against Irish banks in general, but market sources yesterday said much of these fears were overdone.
Bank of Ireland was also sold off by investors yesterday who sent its shares down more than 9pc by lunchtime, before a slight recovery saw them close 7.8pc in the red.
The banks' woes spread across the Irish stock market, sending the Iseq down almost 1.6pc by the closing bell. In the UK, the FTSE closed down 1.71 points at 5,815.23, while the pan European FTSEurofirst 300 closed down 0.5pc.
The US markets opened weak as technology stock Cisco plunged 16pc after downbeat comments about "short term challenges" in Europe and public sector spending.
Asian markets were the exception to the gloomy global picture, with shares in Shanghai and Hong Kong rising 0.8pc and 1pc respectively, led by energy and bank stocks.