Comedy of eires

2 December 2009 By Margaret Doyle

European authorities are blocking Allied Irish from paying out bond coupons and dividends to investors. But this bailout stick could boomerang painfully by giving Ireland an even bigger stake in its banks. The EU should be more flexible to prevent this unwanted result.

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AIB, one of Ireland's two biggest banks, has agreed to suspend coupon payments on its tier 1 and tier 2 bonds following a request from the European Commission. It is the latest statesupported bank that the Commission has asked to halt payments on subordinated bonds.

The coupon ban triggers a "dividend stopper" that also prevents the bank from paying dividends on both ordinary shares and on 3.5 billion eurosworth of preference shares issued to the Irish government when it recapitalised AIB in May.

Thanks to a clause in the preference shares, AIB would then be liable to issue ordinary shares equivalent to the 8 percent dividend due to the government next May. Analysts estimate this could boost the state's stake from 25 percent to around 40 percent in both banks, an outcome that neither Ireland's finance minister, Brian Lenihan, nor the banks wish.

The Commission has signalled it is open to proposals from AIB to address this dilemma as it considers the restructuring plan submitted on Nov. 13. It told Reuters it would "support efforts of AIB to raise private capital, including measures aimed at providing adequate remuneration to the government's preference shares without necessarily diluting existing.

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