A new Irish government is likely to wait until a fresh round of stress tests are completed before recapitalising the country's top lenders, giving the only bank left trading on the main index more time to avoid state control.
The main opposition party, expected to lead the next government after a Feb. 25 election, said a new administration should wait until after the central bank completes its sector review, at the end of March, before putting more capital into lenders.
"If there is no government until March 9 or beyond that, I think it is prudent for (an) incoming government to wait until stress testing before putting capital in," Fine Gael's finance spokesman Michael Noonan told a news conference on Thursday.
Bank of Ireland, Allied Irish Banks and EBS Building Society had an end of February deadline to boost their capital under the terms of an EU/IMF bailout sparked by the crisis in the country's banks.
With private investors steering clear of Irish banks, the government was expected to inject upto 10 billion euros into the three banks before the end of this month.
But the outgoing government shelved that plan on Wednesday arguing that without a parliamentary majority it no longer had a mandate for such a large transfer of funds, which should instead be carried out by a new administration.
A new parliament is due to convene on March 9 and the centre-right Fine Gael party and the centre-left Labour party are expected to form the next government.
Both parties are campaigning to renegotiate the bailout and are trying to reduce the bank burden on taxpayers, who have already forked out over 46 billion euros in capital for the banks and face years of cutbacks and tax increases to help pay for a disastrous property bubble.
Analysts said making the banks boost their capital ratios by the end of February, before the central bank's review is complete, never made any sense because private capital would want to see the results of that review before committing any funds.
"I think it's a more sensible policy than we had but it looks like it's been triggered by politics rather than sense," said Dermot O'Leary, chief economist at Goodbody Stockbrokers.
COURTING INVESTORS
Delaying the recapitalisation until after the results of the stress tests would give Bank of Ireland, the only lender still listed on the main stock index, more time to try and tap private capital for the 1.3 billion euros it needs to raise.
"This isn't the banks being let off the hook, it just allows for more information to be presented by the banks to the market which at least puts them in a position to court external and non governmental capital," said Kevin McConnell of Bloxham Stockbrokers.
Even with the results of the stress tests, Bank of Ireland will struggle to attract private capital given that investors have been badly burned by the country's beleaguered lenders and uncertainty over whether a new government will impose losses on senior bondholders in Irish banks.
Fine Gael and Labour both want bank bondholders to share more of the pain but Fine Gael has repeatedly said it will not do anything without the support of the European Central Bank (ECB), which is opposed to burning senior bondholders for fear of the contagion risk.
But a delay in recapitalising the banks gives both parties more time to argue their case with Frankfurt ahead of a crucial EU summit at the end of March at which Europe is expected to come up with plans for a more comprehensive approach to dealing with the region's debt crisis.
"It does open up the possibility of further negotiations on burden sharing with the banks because the capital won't be injected. And that's what we'll be hearing a lot about in the next few weeks," said O'Leary. Senior debt in both Allied Irish Banks and Bank of Ireland dropped on Thursday with AIB's 4.5 percent January 2012 issue trading off around 2.5 points to 74.25 percent while Bank of Ireland's 4.625 percent 2013 senior issue trading around 0.75 points lower.
