The debt crisis has brought the Irish banking system to its knees. Beleaguered Irish banks have so far depended on the Central Bank of Ireland and the European Central Bank, or ECB, to bail them out, a reliance that's only increased over time. The latest stress test revealed a capital shortfall of $33.9 billion in the banking sector. But more importantly, it has uncovered a disturbing truth: To keep its crumbling banks from collapsing, Ireland indisputably needs to nationalize the entire sector.

Clearly, this is Irish banking's worst crisis to date. The international bailout package to save Irish banks now totals $95.6 billion since the beginning of the catastrophe, and the capital holes pose serious threats to the sector going forward. Yet despite the massive bailout efforts, nothing has really changed.

The Goliaths fail the test
The four banks that went through the stress test rank among Ireland's biggest financial institutions: Allied Irish Bank (NYSE: AIB), Bank of Ireland (NYSE: IRE), Irish Life & Permanent and EBS Building Society. These banks need an overhaul to meet their huge cash requirements, and they'll have to receive funding from the European Union-International Monetary Fund credit line.

Of the four, mostly state-owned Allied Irish Bank seems to be the neediest, requiring a capital injection of $18.8 billion to cover its anticipated losses. This is more than half of the total capital requirement as suggested by the test, bringing AIB's bailout total to a colossal $29 billion.

Bank of Ireland, in which the nation of Ireland has a 36% stake, will need to raise $7.3 billion privately by June to avoid majority state ownership in the bank. ILP, which had so far avoided taking government money, requires $5.6 billion, and EBS needs $2.1 billion. AIB is being pressed by the government to merge with EBS as part of its restructuring plans.

Shares of AIB and Bank of Ireland, however, took huge leaps after the test results were announced. AIB rose 20.4% to $2.89, while Bank of Ireland increased 22.3% to $2.14. But considering both banks' past performance and murky future, does that even matter at this point?

Filling the coffers
The all-important question here remains unanswered: Who will bear the burden of filling the huge capital gaps gaping at the Irish economy?

If the government takes majority ownership of the country's largest lenders and nationalizes the losses, it will only saddle the country's economy with more debts, making Ireland's chances of defaulting more certain. Standard & Poor's and Fitch cut their ratings for Ireland amid weaker economic growth and an increase in the bailout costs of the banks. Clearly, that's not an optimal path.

Plan B
On the other hand, the ECB has proposed a plan to breathe life into the lifeless banking systems in Ireland and other members of the Eurozone. The plan would switch from short-term funding to a longer-term liquidity facility – a replacement for the Emergency Liquidity Assistance that the EU's central bank has provided so far. The new facility, tailored specially for Irish banks, is somewhat similar to the ECB bond buying program, since it comes with no fixed time frame. This should be a breather for the troubled Irish banks reeling under the pressure of mounting debts.

All in all, the rigid restructuring of the Irish banking sector may kill any hope of these banks' long-term sovereign dreams. I think they're pretty much finished as private entities. Although shares of both AIB and Bank of Ireland have risen by more than 20% on the news that investors wouldn't have to take a discount, the long-term prospect of investing in these plagued banks definitely looks bleak, if not outright perilous. Don't let momentary market movements small-f fool you here, Fools.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.