One of the biggest Wall Street banks has warned investors not to bet on Ireland defaulting on its debt, as its financial position remains "remarkably strong" despite the banking crisis and economic downturn.
JP Morgan bond analysts pointed out in a note to clients this week, that many other eurozone countries "have significantly worse public sector debt to gross domestic product (GDP) ratios".
In a worst-case scenario, the analysts, led by Christian Leukers, see the country's indigenous lenders writing off €26.9bn of bad loans over the coming years.
This would require a further €12.9bn of capital injections, in addition to the €7bn being pumped into Allied Irish Banks and Bank of Ireland.
Shares in the two banks plunged to record lows yesterday as investors continued to speculate that a large part of the Government's preference share investment into both will have to be converted into actual equity stakes.
However, they closed the session off their lows, with AIB down 5.3pc at 32c and BoI off 13.9pc at 15.5c.
Still, JP Morgan believes Ireland can afford to bail out all the banks -- notwithstanding the current turmoil in the debt markets.
"However, we have some doubts as to whether the political will will be there for institutions with less direct systemic relevance," they said.
Even as the Government prepares an emergency Budget for next month to raise taxes and rein in spending against the backdrop of rapidly-deteriorating public finances, JP Morgan said it still "has significant capacity to service a large increase in its quantity of outstanding debt".
JP Morgan has recommended that speculators who have been buying protection against both AIB and BoI defaulting on their loans in the 'credit default swaps' (CDS) market should also get out at this stage.
The cost of these insurance instruments -- which are now traded more by speculative hedge funds than investors in bank debt -- have risen sharply in recent months.
CDS spreads on five-year AIB bonds have spiked to 624 basis points, or 6.24pc, from 135 points on the day of the €440bn Government guarantee.
This means that an investor buying protection on €10m of AIB bonds must pay €624,000 per annum.
Spreads on BoI debt have widened from 146 basis points to 647 over the same period, while CDSs on Irish sovereign bonds have soared 10-fold to 361 points.
However, JP Morgan noted that the Government has managed to raise €10bn from bond sales so far this year at much cheaper levels than the CDS spreads imply.
"The €7bn used to recapitalise BoI and AIB has been sourced from the Government-run pension fund, which has circa €16.5bn of assets.
"While further support for the banks is likely to require external funding, we think this is likely to be costly, rather than impossible," the analysts said.