Govt forced to up stake in Bank of Ireland

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The Irish government reluctantly received a 15.7 per cent stake overnight in Bank of Ireland after the European Union blocked its original plan to receive a euro250 million ($NZ495.3 million) cash dividend from the government-supported bank.

Finance Minister Brian Lenihan said the government had no choice but to take about 185 million newly issued ordinary shares under terms of its 2009 bailout of Ireland's second-largest bank. The move diluted the value of existing shares, and plans are in the pipeline for cash-strapped Bank of Ireland to issue more stock in coming months.

Shares in Bank of Ireland fell 11 per cent in the first minutes of trade on the Irish Stock Exchange, but partly recovered to close at euro1.18, down 6 per cent.

European Union regulators have yet to approve the Irish government's plan to receive annual cash dividends from both Bank of Ireland and the country's largest bank, Allied Irish Banks PLC.

The government last year provided euro3.5 billion in cash to both banks. In exchange the government received a 25 per cent "preference" stake in each bank and was supposed to collect annual cash dividends equal to 8 per cent of the investment, or euro280 million from each bank.

Had EU regulators not blocked the cash dividend, the government would have received euro250 million yesterday from Bank of Ireland. The final euro30 million was not to be paid because a full year has not elapsed since the March 2009 bailout.

Lenihan said he remained optimistic that EU regulators would approve the cash-dividends element by May, when the first euro280 million dividend from Allied Irish Banks is due.

Lenihan said the government would have preferred to receive cash Monday because of its Ireland's struggle to contain its national deficit. But he said the shares in Bank of Ireland were going into the state's Pension Reserve Fund and would be left there for decades.

The bailout deal allows the government to convert both of its 25 per cent "preference" stakes - which cannot be traded on open markets - into new ordinary shares in 2014 if either bank does not repay the state's euro3.5 billion original investment by then.

But analysts say Bank of Ireland needs to drum up billions more in cash this year. It may seek to convert some of the government's preference shares into ordinary shares early as part of that effort. Asset sales are also considered likely.

- AP