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Banks will need another €25bn

Ireland's financial future has been dealt a massive blow as a further black hole of up to €25bn in the Irish banks has emerged as part of the Government's stress testing.

Senior government sources have confirmed to this newspaper that the stress-testing process will show that the state of the banks' balance sheets is "considerably worse" than previously thought.

It has emerged that on top of the €10bn capitalisation deferred by former Finance Minister Brian Lenihan last month, losses at the banks mean that a further injection of between €15bn and €25bn could now be needed.

The results of the rigorous stress-testing process, designed to restore confidence in the banking system, are to be presented to new Finance Minister Michael Noonan next week.

News that Ireland will need substantially more money from the IMF/EU to address the crisis in the banks is a blow to Taoiseach Enda Kenny's hopes to get a better deal at the EU summit later this month.

Before entering government, both Fine Gael and Labour committed to putting the deferred €10bn into the banks, but it is now clear the amount needed will be at least double that.

"The additional amount is certainly higher than €10bn but is lower than the huge figures being spoken about in Europe. But inevitably it does mean further pain for the taxpayer," a senior government source told this newspaper.

The position is so serious that at least one of the main banks cannot source funding on the international capital markets and is relying on the Central Bank of Ireland and the European Central Bank for funding.

Under the terms of last November's €85bn IMF/EU deal, €35bn of that was allocated for capitalisation of the banks. The initial €10bn was due to go in last month but was deferred because Mr Lenihan said he "had no mandate" to carry out that transfer. The remaining €25bn was kept as a contingency fund to be used only as a last resort.

However, given the deeper level of losses on the balance sheets of the banks as revealed by the stress testing, it now seems the entirety of that contingency fund could be used up to fill the ever-increasing hole in the Irish banks.

Writing today in the Sunday Independent, UCD economist Colm McCarthy said the plan under the IMF/EU deal to recapitalise the banks could not be financed within the resources available.

"The programme (for government) does mention the need to cap the exchequer cost of the bank rescue, which is a roundabout way of acknowledging that additional financing in some form will be needed," he said.

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Given the €150bn-plus line of funding given by the ECB to Ireland to date, any need for further capital will severely damage Taoiseach Enda Kenny's position to obtain more favourable terms in terms of the bailout at the EU summit in two weeks' time.

By drawing down on the additional funds, Ireland's debt burden will also increase to above 120 per cent of GDP, which is incredibly high.

Senior government sources said this weekend that while the stress testing was not complete, early estimates were that the state of the banks was once again worse than feared.

"The hope was that this stress-testing process would not show any further losses. Unfortunately, that is not the case, there is worse still to come," the source said.

The gravity of the news means there are growing fears that Anglo Irish Bank chairman Alan Dukes's prediction that a further €40bn -- on top of the €10bn set aside -- could be needed to meet the banks' needs may not be far off.

Two weeks ago, Central Bank governor Patrick Honohan said he would be "very disappointed" if the entire contingency fund would be needed, as it now appears.

Mr Lenihan said the figures being talked about appear speculative but his deferral of the capitalisation at the end of February would enable the new Government to boost the banks' balance sheets in one go, once stress testing was complete.

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