Anglo Irish Bank's bad debt charge, to be disclosed this week when it publishes its half year results, is expected to be the largest loan loss recorded in Irish banking history. The government will have to inject an estimated €2.5bn into the bank just to prevent it drifting towards insolvency.

The ailing property lender is expected to write off approximately €3.5bn of delinquent loans, which will devour its operating profits and push the bank massively into the red for the six months to 31 March.

The loss will obliterate much of Anglo's capital and drop the bank far below minimum reserve levels required by the regulator, forcing an emergency waiver from normal capital rules.

The government may even decide to stop paying some Anglo debt-holders their interest payments to ease pressure on the bank (see story in related articles).

Anglo is also going to publish extracts of a new business plan this week, which will end its role in property development lending as part of a "de-risking" strategy. Instead it will assume a new brand identity lending to small and medium-sized businesses.

Sources at the weekend said a waiver from capital rules was most likely, as the government did not yet have approval from the EU to provide the estimated €2.5bn recapitalisation Anglo will need to keep it above water.

Instead the regulator appears prepared to allow the bank to count its supplementary capital as core reserves until the government can inject the required funds to make good the shortfall.

The supplementary capital, known as Tier 2 capital, is made up of preference stock and subordinated debt and usually is not counted when measuring core financial strength. Anglo has €3bn in undated preference shares and nearly €2bn in other subordinated instruments.

Last year the UK regulator permitted Northern Rock, the mortgage lender nationalised by the British government in September 2007, to use its subordinated debt as core capital when the bank's Tier 1 ratio fell close to zero.

According to analysts, this is the only option left as Anglo is not flush enough to withstand the cash outflow required for a capital-enhancing debt buyback programme, such as the one announced by Bank of Ireland last week. And given expected losses, Anglo's capital reserves will probably fall too low for a Lloyds-style junior-for-senior debt swap to be adequate to its needs.