UPDATE 5-Ireland plans "credible" bank system after tests

* Latest stress tests due for release at 1530 GMT Thursday

* Govt ends sales talks on EBS; expected to shrink sector

* Irish Life would consider sale of life arm
(Adds suspension of shares in Bank of Ireland, AIB on
Thursday)

By Padraic Halpin and Carmel Crimmins

DUBLIN, March 30 (Reuters) – Ireland will outline its plans
for a “credible banking structure” after the results of stress
tests this week that are expected to signal the effective
nationalisation of the entire financial system.

Ireland’s new government and its IMF and EU paymasters are
hoping Thursday’s tests will put a final figure on the cost of
dealing with its banking crisis and persuade investors that it
can avoid a damaging near-term restructuring that would add a
new leg to Europe’s debt crisis.

Finance Minister Michael Noonan will address parliament
after the results of the tests are announced at 1530 GMT,
Thursday.

“The minister will outline decisions that are being taken
by government … in taking definitive steps to ensure that we
have a strong, working, credible banking structure,” Prime
Minister Enda Kenny told parliament on Wednesday.

Ireland’s bank sector, whose reckless loans forced the
country to seek an EU-IMF bailout last year, will be shrunk
dramatically, possibly to just two players, and there was
speculation the government would take control of bancassurer
Irish Life & Permanent (IPM.I: Quote, Profile, Research), the only lender to so far avoid
a state bailout.

Trading in the shares of Bank of Ireland (BKIR.I: Quote, Profile, Research) and
Allied Irish Banks (ALBK.I: Quote, Profile, Research), the top two lenders, will be
suspended on Thursday, pending their stress test results and
any subsequent announcements, to avoid “the possibility of a
disorderly market,” the Irish central bank said after
Wednesday’s close.

In a surprise twist, the government broke off talks to sell
the EBS Building Society [EBSBS.UL] with a private equity
consortium including the Carlyle Group and U.S. investor Wilbur
Ross, saying it was not sufficiently commercially attractive.

The consortium led by Dublin-based Cardinal Asset
Management had been willing to invest more than 600 million
euros in the building society, and analysts said the move to
end the talks could mean the government wanted to merge EBS
with Irish Life’s banking arm, permanent tsb.

“It’s strange that this announcement comes on the eve of
the stress test results and strange that it comes hard on the
heels of rumours of significant state ownership in Irish Life &
Permanent,” said Stephen Lyons, analyst with Davy
Stockbrokers.

“It suggests an increase possibility of a tie up.”

“We had hoped EBS would have been a nice milestone as a
precursor to further outside parties coming in and hopefully,
some time down the line, potentially buying one of the other
entities outright so the fact that this has fallen apart is
definitely a negative.”

SELLING IRISH LIFE JEWEL?

Ireland already controls four of its six local lenders
after pumping in 46 billion euros in fresh capital. Two banks
— Anglo Irish and Irish Nationwide — are being wound down.

Fears the stress tests on Ireland’s four remaining lenders
would reveal a hole in excess of the 35 billion euros earmarked
for the banking system in an 85 billion euros EU-IMF bailout
have been tempered by European Central Bank plans, revealed to
Reuters last week, to provide extra liquidity.

Local media have said Bank of Ireland, AIB, Irish Life &
Permanent and EBS will need between 18 billion and 23 billion
euros in additional capital.

Six analysts surveyed by Reuters put a figure of 23 billion
euros on the bill.

Irish Life & Permanent said it would consider selling its
cash-rich life insurance arm to minimise the burden on the
state from any capital bill, which local media have said could
be between 2 billion and 3 billion euros.

“I think it is likely that our shareholder will do whatever
they can to minimise the burden on the state and if that means
selling the life assets, then so be it,” Gerry Hassett chief
executive of the retail division of Irish Life, told national
broadcaster RTE.

“I think the assets are valuable and we’ve had a lot of
expressions of interest in the business.”

The embedded value of the life insurance business was 1.3
billion euros at the end of last year but a fire sale may mean
the company would generate less from its crown jewel.

“Selling from a position of weakness is not the best place
to start from,” said Karl Morris, insurance analyst at Keefe,
Bruyette & Woods. “They originally wanted to get rid of their
bank so this is not the best of outcomes.”

NO ROSE-TINTED GLASSES

Enterprise Minister Richard Bruton said the stress tests,
carried out by the central bank and screened by external
experts, needed to reveal the true extent of the banks’
problems after previous tests last year gave them a clean bill
of health.

“Afterwards there can be no feeling that people are looking
at Irish banks through rose-tinted glasses … Our ambition is
to clean the table, and we will do that,” he told German
newspaper Handelsbatt. [ID:nLDE72T0K6]

But there are fears the tests will still be too
optimistic.

Under the adverse macroeconomic scenario, unemployment hits
14.9 percent this year but figures out on Wednesday showed the
estimated rate is already near that, holding steady at 14.7
percent in March.

The test conditions released this month also showed a
worst-case fall in property prices of 62 percent between 2007
and 2013, which has already been reached in some areas.
[ID:nLDE72F1Q8]

The ECB is preparing a facility that will give Irish banks
medium-term funding, a euro zone central bank source told
Reuters last week, alleviating the need for a fire sale of bank
assets to cut their dependence on short-term funding.

ECB executive board member Juergen Stark was quoted as
saying on Tuesday that the new plan was just a rumour and there
is some uncertainty over the legality of providing such aid for
banks that are not held to be financially sound.
[ID:nFLATEE7LY]

Even with an ECB medium-term funding plan, Ireland still
needs Europe to cut the cost and extend the term of its bailout
if it is to convince investors that it is not a default risk.

Germany’s finance minister took a hard line on the euro
zone struggler on Tuesday, telling Reuters that Ireland must
present more savings measures, as Greece did, if it feels the
need to renegotiate the terms of its bailout from the European
Union and IMF. [ID:nLDE72T0E5]
(Writing by Carmel Crimmins; Editing by Patrick Graham, Gary
Hill)

UPDATE 5-Ireland plans "credible" bank system after tests