Ireland's government is considering wiping out the value of some junior bonds in Bank of Ireland to ensure the lender generates 350 million euros (303 million pounds) in additional capital by the end of this year.

Finance Minister Michael Noonan said on Wednesday he was considering applying to the courts for an order forcing losses of up to 100 percent on over 400 million euros worth of subordinated debt. He has asked interested parties to make submissions on the possible move by the end of November.

The government has used emergency powers before to impose losses on junior bondholders in state-controlled Allied Irish Banks and had signalled it would seek junior debtors in Bank of Ireland to swallow more losses after some of them refused to take up previous discounted buyback offers.

Some analysts said a complete wipeout of the bonds' value would be an aggressive move.

The surprise is potential losses of up to 100 percent. I would be very surprised at that. You would think they would come in instead at the 80 percent mark, said Ryan McGrath of Dolmen Securities.

The size is quite small and the precedent has already been set on junior debt. Investors may just view it as the final stages of the haircuts on the junior debt. I don't think they will be shocked by it, McGrath said.

While Ireland has refused to force losses on banks' senior bondholders, which rank on a par with depositors, for fear of triggering contagion in other euro zone countries, billions of euros has been raised towards the cost of bailing out the country's banks by imposing losses on junior debt.

Bank of Ireland has generated around 4.5 billion euros of capital since 2009 by exchanging junior debt for cash or equity at discounts of up to 90 percent of face value. About 600 million euros of Bank of Ireland subordinated bonds remain outstanding.


The lender offered on Monday to buy back up to 1 billion euros worth of mortgage debt at a significant discount to help meet its capital targets under an EU-IMF bailout.

Stress tests in March showed Bank of Ireland needed to raise an additional 4.2 billion euros in core Tier 1 capital to bullet-proof its balance sheet against future property-related losses.

So far, it has generated 3.85 billion euros towards that goal, most of it by imposing losses on junior bondholders and through a 1.1 billion euros investment by a group of North American investors, who now own 35 percent of the bank.

Relations between the government and the Bank of Ireland have deteriorated in recent weeks after the lender, in which the state holds a 15 percent stake, refused a request from Prime Minister Enda Kenny to pass on a recent ECB rate cut to holders of its variable mortgage products.

Bank of Ireland is the only Irish lender to avoid falling into state control after a disastrous property crash and was the only domestic bank in receipt of government support to refuse Kenny's request.

One analyst, who declined to be named because of the sensitivity of the topic, said Noonan's announcement on Bank of Ireland's junior bonds, coming on the heels of the spate over mortgage rates, might be interpreted by some investors as the state flexing its muscles.

It is a worrying trend and from a credit perspective it is difficult to create an equity case when you have this government interference, he said.

(Editing by Elaine Hardcastle and David Holmes)