Government moves to take control of Allied Irish

Allied Irish Bank (AIB) is set to fall into the hands of the Irish taxpayer, after a court passed the government's move to bail out the teetering group with a further €3.7bn (£3.1bn).

Shares in AIB plunged by a fifth yesterday after the Irish High Court approved the state's plan, which effectively nationalises the bank.

Ireland's finance minister Brian Lenihan said that the extreme move had been necessary after a "gradual erosion" of deposits at the bank and that there was no other option. He told broadcaster RTE: "We wouldn't have had an AIB on January 1 if this injection wasn't made."

In its official statement the bank said raising the additional cash would ensure it met the year-end regulatory capital requirements imposed by the Central Bank of Ireland.

AIB, which is 19 per cent owned by the government, will follow Anglo Irish Bank, the Irish Nationwide Building Society and EBS Building Society into the embrace of the state.

Mr Lenihan said: "We are going to have to accelerate the phasing out of Anglo Irish Bank and Irish Nationwide very early in the new year."

AIB's share price has suffered a dramatic collapse from a pre-crunch high of €23.95 in February 2007. It closed yesterday at 33 cents.

This is the latest setback in a series of troubled months for Ireland's economy and its government. European finance ministers were forced to approve an €85bn bailout for the country last month, including €35bn to recapitalise the banking system. This came as the European Union hoped to head off potential contagion threatening to engulf Portugal and Spain.

But problems are mounting in those regions too and yesterday Fitch downgraded Portugal's credit by one notch to A plus, putting it four notches under the highest rating of AAA. It blamed slow reduction of the country's deficit and a tough financing environment. Over the past month its rivals, Standard & Poor's and Moody's, have also warned they might cut the country's rating.

Yesterday's court order came under the Credit Institutions (Stabilisations) Act which was enacted this week. The European Commission had approved such an injection on Tuesday. It follows the €3.5bn bail out of the bank last year.

The court ordered AIB to cancel its listing on the Irish Stock Exchange as well as on the main market of the London Stock Exchange. The group said: "The capital increase by year-end is, in the opinion of AIB's board of directors, critical for the continued activities of the company."

The capital increase is expected to be completed shortly, as the government moved to ensure the bank would be stabilised before the end of the year.

AIB's plan to issue new shares to the National Pension Reserve Fund will see the government's holding of almost a fifth of the group rise initially to 49.9 per cent. This is so the group can complete the sell off of its stake in Poland's Bank Zachodni WBK to Banco Santander. The government stake will then rise to 92.8 per cent. Failure to carry out the move before the end of the year "would likely prompt further action from the Irish State, including the possibility of full nationalisation".

In its statement, the bank also said it will need €6.1bn more to meet its capital requirements. It said: "AIB is considering a number of options to fulfil this requirement" before the end of February. One of those is issuing further shares to the state.

The EC has approved the plans as the bank looks to ensure it has enough capital to meet EU regulations.