The Government will have to decide how much of Permanent TSB it is prepared to sell to private investors, in the wake of tomorrow’s announcement of the results of the banking stress tests.

The bank will have to try to raise at least €200 million from private investors over the next nine months, but market sources believe that investors may be more attracted by making a larger investment and taking a bigger stake in the bank.

As the State currently owns 99.2 per cent of the bank, any new investment will involve it selling down its stake, with the key issue being how much of its shares to sell and how much is it likely to receive for them.

The stress tests will say that PTSB needs to raise more than €800 million in new capital, as it is not judged to have enough capital to meet a severe economic downturn.

After the test results, the bank will publish a plan to achieve this. It will say that events since the stress tests have reduced the amount of new capital that has to be raised by several hundred million.

The bank can also count in €400 million in contingent capital (COCOs) which the Government invested in PTSB as part of its recapitalisation in 2011, though it is not thought likely that these notes will be immediately converted into ordinary equity.

After taking account of these factors, Permanent TSB is likely to need to raise some €200 million over the next nine months to meet its capital requirements.

The Government has said it hopes this money can be raised from private investors. Market analysts believe this may be possible, provided the economy continues to improve and PTSB can point to the likelihood of being able to write back provisions made against its loanbook.

PTSB has hired Deutsche Bank to advise it on its options. A key issue will be what kind of deal a private investor would be prepared to do. An investment of €200 million would only secure a minority stake in the bank – and it is possible that an investor might want to put in more money and take a larger stake.

The Government bailed out the former Irish Life&Permanent with a €4 billion injection of funds. It later recouped more than €1.3 billion from the sale of Irish Life and it has been receiving a €40 million annual payment from PTSB relating to the COCOs. The decision to sell a stake in PTSB in the months ahead would now highlight that much of the initial investment will never be recouped.

However, selling down its shareholding could still be politically more attractive to the Government than putting in fresh cash.

It is also possible that pressure could come on the Government to inject the cash itself if private investment is not available on reasonable terms. Part of the negotiations ahead will also relate to the COCOs and whether they should be converted into ordinary equity.

There may also be technical issues here in relation to their conversion, as well as questions about the best financial structure to attract outside investment.

PTSB’s business plan has also still to be approved by the EU Commission, another likely requirement of an outside investor.

The possible sale of a State stake in PTSB also raises questions for the timing of a sale of part of the Stake’s stake in AIB.

The State could try to do a deal on PTSB early next year and then sell a substantial minority stake in AIB – either to an investor or via a partial float – in the second quarter.

However, the timing looks tight and underlines how vital it is for the Government that market conditions and investor sentiment towards Ireland remain favourable.