Irish Government injects money

DUBLIN (Reuters) - Ireland's government plans to inject 8 billion euros ($10.3 billion) into the country's top two banks and is in talks to underwrite some of the lenders' potential bad debts, a source close to the talks said on Monday.

The recapitalization plan, which is set to be unveiled later this week, doubles the amount Dublin had originally said it would invest in Allied Irish Banks (AIB) (ALBK.I) and Bank of Ireland (BKIR.I).

"There is a small bit of tinkering yet to be done," said the source, who declined to be named because of the sensitivity of the talks.

The finance ministry, AIB and Bank of Ireland all declined to comment.

The source said the government wanted to divide the 8 billion euros equally between the two banks but AIB, which has previously signaled a weak appetite for state funding, is reluctant to accept 4 billion euros.

In December, the government said it would invest 2 billion euros in each of AIB and Bank of Ireland via preference shares, giving Dublin 25 percent voting rights over "key issues."

It also said it would underwrite their plans to raise an additional 1 billion euros each.

With the new plan, it was not clear what the breakdown will be between preference shares and ordinary shares.

Investors, rattled by the nationalization last month of No. 3 lender Anglo Irish Bank, welcomed the prospect of an enlarged capital injection but they were anxious to see the cost of the plan to the banks and the potential dilution effect.

"It's better than a rights issue or being nationalized, it's the best option that could be expected," said one Dublin-based trader.

Shares in AIB rose over 6 percent to 1.3 euros but Bank of Ireland remained in the red, down 1.54 percent at 64 euro cents.

PIVOTAL DECISIONS

The credit crisis and the bursting of its property bubble ended Ireland's 'Celtic Tiger' boom last year, blowing a hole in public finances and burdening banks with rising debt losses.

The government is trying to squeeze 2 billion euros in public spending cuts in talks with unions and employer groups this week and Prime Minister Brian Cowen has set a deadline of Tuesday to seal a deal.

Goodbody Stockbrokers said that while quick government help for the banks was welcome, it was even more urgent for the government to strike a convincing deal on cutting the ballooning budget deficit. "The market will firstly need to gain comfort regarding whether the sovereign itself is making inroads in addressing its deteriorating fiscal position," Goodbody analyst Eamonn Hughes said.

Moody's credit rating agency warned Ireland on Friday it was in danger of losing its prized AAA sovereign debt rating, echoing a similar warning from Standard & Poor's last month.

Both agencies cited the potential risk from the Irish government's exposure to the banking sector and its buckling public finances as the recession deepens.

"It would not be an overstatement to suggest that decisions made over the next few days in Ireland will play a pivotal role in the trajectory of the Irish economy for years to come," said Goodbody Chief Economist Dermot O'Leary.

($1=.7783 Euro)