Irish bank shares slumped this afternoon as investors speculated that the bailout will dilute their holdings in the lenders.
By 3.55pm, Irish Life and Permanent was trading down as much as 21.7 per cent , dipping to 90 cent per share. Earlier, it had hit a low of 82.8 cent. This was followed closely by an 18.5 per cent decline in Bank of Ireland's share price, which fell to 39.2 cent, up from the day's low of 36.9 cent.
AIB was off 3.5 per cent to 42 cent, after dipping to 37.8 cent at about 1pm.
Minister for Finance Brian Lenihan today said Irish banks would have to be downsized, to meet the real needs of the Irish economy.
"The whole question of seeing are there other assets that can be got off the balance sheets whether by sale or by transfer to Nama (Ireland's bad bank), that's on the agenda," Mr Lenihan said.
The aim is to shrink the loan book to ease the funding strain, which has intensified after an exodus of deposits from lenders in the past six months, adding to Irish lenders' dependence on ECB funding, which has risen to €130 billion.
New stress tests will be carried out to determine how much capital banks will need.
Analysts said at least €5 billion more would need to be injected into the country's two biggest lenders immediately as part of Ireland's international rescue.
Mr Lenihan should also break up the lenders in preparation for a sale and force further losses on subordinated bondholders of AIB, Bank of Ireland and Irish Life and Permanent, the analysts said.
"We need to sort the bank issue out once and for all," Oliver Gilvarry, head of research at Dolmen Securities in Dublin, said in a telephone interview. "The banks need to be capitalised with equity up front."
Goldman Sachs Group chief european economist Erik Nielsen said yesterday the government needs €65 billion to fund itself for the next three years and a further €30 billion for the lenders.
Chairman of Anglo Irish Alan Dukes said more bank nationalisations were likely following Dublin's move to seek a bailout.
UK and Irish stocks retreated after the bailout failed to stem concern that Europe's sovereign-debt crisis will spread to other indebted countries such as Portugal and Spain.
"There are unresolved issues in particular regarding Portugal, and whether this is just a liquidity problem or a solvency problem," said Jonathan Fayman, a fund manager at BlueBay Asset Management in London, which oversees about $38 billion.
Additional reporting: Bloomberg, Reuters