The government is at risk of overpaying to convert its preference shares in AIB to ordinary shares as part of post-Nama recapitalisation if it does not exercise its warrants before the bank's shares fall below the €0.975 strike price.

AIB shares closed at €1.09 last week after sharp declines amid a widespread market sell-off caused by concerns over Greek sovereign debt. Bank shares were especially hit in the rush for the exits.

If the weakness continues as expected, it could force the government to convert part of the state's 25% preferential holding in the bank into ordinary stock to avoid paying a premium.

The government said it would help recapitalise the banks, but only after they dispose of assets or raise money through new equity issues after Nama transfers begin.

"I wouldn't say they would be in the mood to strike them prior to any potential equity raisings by the banks. It would damage their investment cases," said NCB Stockbrokers analyst Ciaran Call­aghan.

Royal Bank of Scotland's bank analysts recommended last month, however, that the government should convert a portion of its preference shares to improve the market perception of the banks' capital strength - something institutional investors have said they would welcome ahead of any private capital raising.