I really can't resist this.
Via Brian Lucey comes this report that Allied Irish Banks (AIB) is having some difficulty servicing its debts.
AIB was bailed out by the Irish government in February 2009 when its share price collapsed due to severe liquidity problems and loss of market confidence. It was subsequently nationalised when the collapsing Irish property market destroyed its solvency. Currently, the Irish government owns over 99% of its ordinary shares.
But it's not the shares that are the problem. In three weeks' time, AIB is supposed to pay a cash dividend on 3.5bn euros of preference shares held by the National Pensions Reserve Fund Commission (NPRFC). AIB can't afford to pay the interest on them, apparently, despite the fact that it made an operating profit of 445m euros in 2013.
AIB has a creative solution to this. Cash shortfall? No problem. Issue some ordinary shares to pay the interest. Sounds wonderful, doesn't it? But the NPRFC is a government organisation. So the Irish government not only owns 99.8% of the ordinary shares of AIB, it has £3.5bn of subordinated debt, too - the interest on which will be paid in the form of yet more ordinary shares. Maybe I am cynical, but this sounds like a rip-off to me. AIB's net worth in three weeks' time won't be any greater, so the additional shares will simply dilute the government's holding. In effect, the Irish government will be paying interest to itself.
Mind you, this would still be the case evcn if AIB paid cash, really. After all, interest payments on debt reduce dividend payouts and retained earnings. What the Irish government gained in interest payments it would lose in lower dividends and return on equity.
But the real question is - if AIB is already fully nationalised, and it STILL can't afford to service its debts, why is it still open for business? Why isn't it being wound up? After all, the only reason this solution is possible at all is that the debt is owed to the sovereign. If it were owed to private sector lenders, this would be another bailout. AIB can hardly be considered a going concern, whatever its management might say. It's the worst type of zombie bank - draining resources from the sovereign to keep it alive, while adding little value to the economy it is supposed to serve. Wouldn't Ireland be better off without it?
Mind you, the AQR and stress tests might finish it off. I live in hope.