Ireland hit its banks with a hefty penalty to take loans off their hands and said they needed at least 22 billion euros ($30 billion) in extra funds to recover from a property collapse that was worse than feared.
A series of official announcements late on Tuesday revealed the discount on property loans Ireland's National Asset Management Agency (NAMA) is taking from stricken banks and the scale of additional capitalization needed as a result.
NAMA, the government's so-called bad bank, said it would buy loans with a total nominal value of 81 billion euros from what were the country's three largest banks and two of its building societies.
The average discount on a first tranche of loans, to be transferred over the coming days, is 47 percent -- much more than the 30 percent average estimated by the government last year for all loans acquired over the course of 2010.
The deeper discount reflects the magnitude of the property market collapse, particularly in the UK and Ireland, and Finance Minister Brian Lenihan acknowledged what the banks faced was huge.
At every hand's turn our worst fears have been surpassed, he told parliament.
The banks played fast and loose with the economic interests of this country, he added, referring to appalling lending decisions that will cost the taxpayer dearly for years to come.
Fully nationalized Anglo Irish Bank needs by far the most -- 8.3 billion euros now and possibly a further 10 billion euros in future.
Of the listed banks, Allied Irish Banks Plc
Even so, Lenihan said, the state might have to take a majority stake in AIB, whose shares have plunged over the past two days in anticipation of negative news.
AIB is to start selling assets immediately in the United States, Britain and in Poland, where it owns lender BZWBK
Bank of Ireland
Already last year, the Irish state was forced to nationalize Anglo Irish Bank and Lenihan said on Tuesday the state was also taking full ownership of EBS Building Society
Dire as the banks' situation was, officials have said the cost to the state was manageable after its implementation of austerity measures. In the December budget, the government announced tough spending cuts of some 4 billion euros to address one of the deepest recessions in Europe.
The sovereign is in a position to conduct this exercise now on the basis of the public finance changes that we brought about over the past couple of years, Prime Minister Brian Cowen said.
Lenihan described restoring credibility in the banks as the ultimate phase of the resolution of our crisis.
Many in the investment community have praised NAMA -- an acronym that has entered the vernacular in Ireland -- although the Irish opposition has said it is one of the biggest gambles in the nation's history.
Analysts said Tuesday's news had positive elements, notably Allied Irish was being given some time to sell off assets and the news on Bank of Ireland was broadly in line with expectations.
The positives are that we've seen AIB being given time to executive some asset sales. There hasn't been an automatic trigger of the government taking a significant stake in the bank, said Kevin McConnell, head of research at Bloxham Stockbrokers in Dublin.
Ireland's growing state ownership of its banks runs counter to the trend in many other countries that have started to reduce bank shareholdings.
Switzerland made a profit after selling a 9 percent stake in UBS AG
Britain is expected to start selling shares of Royal Bank of Scotland Group Plc
Share prices for RBS and Lloyds have risen close to the average price at which Britain bought its stakes and the government is becoming increasingly confident of making a profit on the billions of pounds it has pumped in.
A full exit could take many years in many countries, however. Sweden, which pioneered NAMA-style schemes, is still a big shareholder in Nordea Banl AB
(Additional reporting by Barbara Lewis in Dublin and Steve Slater in London; writing by Barbara Lewis; editing by Greg Mahlich, Simon Jessop and Andre Grenon)