Investors have responded strongly to the first element of Bank of Ireland's €3.4 billion capital raising plan and domestic investors also expressed support for its upcoming rights issue.
A placement of €500 million, the first part of the bank's fundraising plan to take place, was three times oversubscribed by the time it closed yesterday, according to dealers.
"The rights issue, so far as we can determine the attitude of domestic institutions, will be strongly supported," Frank O'Dwyer, chief executive of the Irish Association of Investment Managers (IAIM), said.
Mr O'Dwyer said based on anecdotal evidence overseas demand would also be high for the rights issue.
"People see investing in the first Irish bank to step forward and do the fundraising ... as a proxy for investing in the recovery in the Irish economy," he said, adding that IAIM members owned less than 10 per cent of Bank of Ireland between them.
"The overall reaction was positive that this was a big enough transaction and equity fund raising to deal with all of the bank's problems," said Mr O'Dwyer, whose IAIM has 14 members managing total assets of €250 billion.
At 5.20pm shares in the bank were 9.5 per cent lower at €1.72 as the stock gave up much of yesterday’s gains. More than 11 million shares were traded in Dublin.
Standard and Poor's Ratings Services today affirmed its A-/A-2 counterparty credit ratings on Bank of Ireland, with a stable outlook.
"We consider that the likelihood of a positive rating action is remote within the rating horizon," Standard and Poor's said.
The financial regulator told Bank of Ireland last month to raise €2.7 billion to meet new minimum capital requirements and compensate for losses on discounted loans sold to the National Asset Management Agency (NAMA), Ireland's "bad bank".
The bank yesterday announced that it plans to raise €3.4 billion under a series of transactions that will see the Government's stake in the bank increase to about 36 per cent.
The deal, which is designed to help the bank recover from the financial crisis, will not involve a further injection of cash by taxpayers.
The increase in the Government's stake will come instead from the conversion of preference shares it already holds in the bank into ordinary equity, while the bulk of the additional capital will be sourced from private investors.
The Government maintained that the real financial benefit would be that the recapitalised bank would "now be in a position to provide credit to Irish businesses and households as the economy recovers".
Under part of the fundraising, the Government will enter into a transaction with Bank of Ireland via the National Pension Reserve Fund (NPRF). The bank will raise €1 billion from the conversion into ordinary equity of part of the Government's €3.5 billion in preference shares.
Speculators are now betting that Greece will default on its debts, amid uncertainty about how a rescue package provided by the European Union and the International Monetary Fund (IMF) will work, and whether such a bailout would even be enough to resolve the country's budget problems.
The Greek bond markets plunged yesterday amid growing worries among investors that the country will need to restructure its debts in spite of the proposed €45 billion assistance package.
Greek two-year bond yields rose three percentage points the biggest one-day jump since it joined the euro to close at 13.14 per cent. This is the highest yield on short-dated debt in the world, according to US bank, Brown Brothers Harriman.
The move came as German chancellor Angela Merkel ramped up pressure on Greece to accept onerous cutbacks as part of its austerity plan.
Brokers in Ireland were upbeat about the outcome of the first stage of the Bank of Ireland recapitalisation. "To a certain extent, it is a vote on the Irish economy as much as Bank of Ireland's prospects," said Kevin McConnell, head of equity research at Bloxham stockbrokers.
Banks are inextricably linked with the economy's prospects, so the stabilisation in the "domestic picture" over the last few months "partly facilitated" the private placement deal.
Institutional investors would be very unlikely to invest in Bank of Ireland unless they believed that the economy had reached a point of stabilisation and recovery, he added.
Commentators also predicted that the level of investor interest in Bank of Ireland's proposals would have a positive knock-on effect for AIB when it follows suit.
Mr Lenihan said the level of private sector investment was "tangible evidence of the growing international and domestic confidence both in Bank of Ireland and our economy".
Additional reporting: Reuters