THE BAILOUT of beleaguered building society Irish Nationwide is likely to exceed the original estimated cost of €2.7 billion by up to one-fifth, Patrick Honohan, governor of the Central Bank, said yesterday.

Speaking in Beijing, China, Mr Honohan put the net cost to the Government of recapitalising Anglo Irish Bank at “about €22-€25 billion”, and on top of this, he said, would be added about €4 billion “mainly to cover one small building society”.

With some €875 million already pinpointed for the recapitalisation of EBS Building Society, Mr Honohan’s comments indicate that the cost of propping up Irish Nationwide could rise to about €3.2 billion.

The final cost of bailing out the building society is likely to depend on the total discount applied to its transfers to the National Asset Management Agency.

Last month Irish Nationwide suffered the largest discount in the second wave of loans sold to Nama due to writedowns of up to 90 per cent on loans provided for speculative land purchases where no planning approval had been secured.

The news on Irish Nationwide comes on the back of last week’s revelation that the bail-out of Anglo Irish Bank could cost more than €24 billion, which sent the spreads on Irish government bonds soaring.

Mr Honohan said the Government would inject more money into the bank in the coming months, “most of which it does not expect to recover”.

With the bank now likely to experience loan losses “in excess of an astonishing 40 per cent of its portfolio”, Mr Honohan put the net cost to the Government of recapitalising the bank at “about €22-€25 billion”, and added that the final decision on the restructuring of the bank will be detailed soon.

Against a background of volatile spreads for Irish government bonds – and indeed of other European peripheral bonds – Mr Honohan said that markets still need to be convinced about the commitment of governments to reduce their budget deficits.

“The sooner the markets are convinced, the sooner the interest spreads will shrink to the benefit of all, including those foreign investors now holding debt which will then appreciate in the market,” he said.

Referring to the Irish economic situation, Mr Honohan said the Government took “prompt, early steps” to improve its fiscal circumstances, and added that for “stressed sovereigns”, getting the public finances back in shape must be a priority.

“The impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending,” he said.

Looking to 2010, he said there would be a “sizable step jump in Irish Government debt, and a sharp transient spike in government borrowing”, but that the capital injections into the banking sector were actually smaller than the rest of the Government deficit in 2009-10.

“Just as expansive credit conditions filled the coffers in the good years, so the unwinding of an unsustainable domestic boom is draining the coffers in much the same way and to a similar magnitude,” he said.

In June, the European Commission said it would press ahead with a bank levy, and Mr Honohan said he was relieved that consensus was building towards a form of tax which would be less likely to add to damaging economic distortions, instead favouring a tax which could be targeted at excessive reliance by banks and other financial firms on short-term borrowing.

Mr Honohan is in Asia until Friday as part of an Official Monetary and Financial Institutions Forum.