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The Latest in the Irish Banking Fiasco

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The debt crisis has brought the Irish banking system to its knees. Beleaguered Irish banks have so far depended on the Central Bank of Ireland and the European Central Bank, or ECB, to bail them out, a reliance that's only increased over time. The latest stress test revealed a capital shortfall of $33.9 billion in the banking sector. But more importantly, it has uncovered a disturbing truth: To keep its crumbling banks from collapsing, Ireland indisputably needs to nationalize the entire sector.

Clearly, this is Irish banking's worst crisis to date. The international bailout package to save Irish banks now totals $95.6 billion since the beginning of the catastrophe, and the capital holes pose serious threats to the sector going forward. Yet despite the massive bailout efforts, nothing has really changed.

The Goliaths fail the test
The four banks that went through the stress test rank among Ireland's biggest financial institutions: Allied Irish Bank (NYSE: AIB  ) , Bank of Ireland (NYSE: IRE  ) , Irish Life & Permanent and EBS Building Society. These banks need an overhaul to meet their huge cash requirements, and they'll have to receive funding from the European Union-International Monetary Fund credit line.

Of the four, mostly state-owned Allied Irish Bank seems to be the neediest, requiring a capital injection of $18.8 billion to cover its anticipated losses. This is more than half of the total capital requirement as suggested by the test, bringing AIB's bailout total to a colossal $29 billion.

Bank of Ireland, in which the nation of Ireland has a 36% stake, will need to raise $7.3 billion privately by June to avoid majority state ownership in the bank. ILP, which had so far avoided taking government money, requires $5.6 billion, and EBS needs $2.1 billion. AIB is being pressed by the government to merge with EBS as part of its restructuring plans.

Shares of AIB and Bank of Ireland, however, took huge leaps after the test results were announced. AIB rose 20.4% to $2.89, while Bank of Ireland increased 22.3% to $2.14. But considering both banks' past performance and murky future, does that even matter at this point?

Filling the coffers
The all-important question here remains unanswered: Who will bear the burden of filling the huge capital gaps gaping at the Irish economy?

If the government takes majority ownership of the country's largest lenders and nationalizes the losses, it will only saddle the country's economy with more debts, making Ireland's chances of defaulting more certain. Standard & Poor's and Fitch cut their ratings for Ireland amid weaker economic growth and an increase in the bailout costs of the banks. Clearly, that's not an optimal path.

Plan B
On the other hand, the ECB has proposed a plan to breathe life into the lifeless banking systems in Ireland and other members of the Eurozone. The plan would switch from short-term funding to a longer-term liquidity facility – a replacement for the Emergency Liquidity Assistance that the EU's central bank has provided so far. The new facility, tailored specially for Irish banks, is somewhat similar to the ECB bond buying program, since it comes with no fixed time frame. This should be a breather for the troubled Irish banks reeling under the pressure of mounting debts.

All in all, the rigid restructuring of the Irish banking sector may kill any hope of these banks' long-term sovereign dreams. I think they're pretty much finished as private entities. Although shares of both AIB and Bank of Ireland have risen by more than 20% on the news that investors wouldn't have to take a discount, the long-term prospect of investing in these plagued banks definitely looks bleak, if not outright perilous. Don't let momentary market movements small-f fool you here, Fools.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (39)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2011, at 3:31 PM, SaureusNola wrote:

    sounds like the words of an investor shorting the stock. Does not reflect the communities belief

  • Report this Comment On April 08, 2011, at 3:43 PM, chochobeelai wrote:

    Could you make these posts more reliable by doing your home work and coming out with ACTUAL figures and not conjured ones?

    It's no wonder why this site is called "Motley Fool" and has a domain name Only fools get hired and fools would want to keep reading.

  • Report this Comment On April 08, 2011, at 3:56 PM, IntristicValue wrote:

    I m with these other two posters. This writer should be writing about 2012, the day the world is supposed to end... Official releases are full of good news and Motley Fool is always pushing the bad news... and speaking of short interest there isn't any...unless 300,000 shares out of 248 million counts... yep, IRE and AIB just had a 40% hop and now it's time to talk it down... This is the same thing the American bank went through 2 year ago before Wells Fargo Shocked the market with huge gains... IRE just recently sold some of it's municial notes for 3.4 billion, so the next major story from them should be that finalizing..I am personally lookng for a 500% return from IRE by this time next year after the paperwork shuffle is done

  • Report this Comment On April 08, 2011, at 4:02 PM, IntristicValue wrote:

    I got a sell order on IRE at $12... Well below it's 5 year high of $100.... but hey, if CAT is leading the charge and shattering all time records, and the 100 year charts say the DOW will go up to 17,000 with the added currency... IRE should be good for $12 a share in the next 52 weeks.. Once the dust settles and the seas calm, the hedge funds will start jumping in and then it's on... take HERO for example, once Obama started handing out permits to drill, everyone jumped on HERO... Same thing will happen in IRE... This isn't Bahrain or Tunisia... ths is Ireland who has had this bank since 1796... They are heavily invested in UK and USA markets...

  • Report this Comment On April 08, 2011, at 4:06 PM, frec99 wrote:

    Why is this "Fool" kept repeating the same thing? His comments lacks credibility when he focused solely on the negatives. To top it all, it sounded like he exaggerated. Surely the Irish Banks have their issues but overall are they as bad he claimed?

  • Report this Comment On April 08, 2011, at 4:35 PM, Robertlhayes wrote:

    Yes Zeeshan Siddique Your some where out in the parking lot on the ire game.The base line game is next thursday( April 14) when ire tell's us all how the private stock placement is going.Zeeshan try reading the irish independent once and a while.It 4.2 billion ire need's and with the junior bond holder trading a billion of debt for share's it's more a matter of how much they get for the share's in the private placement and how much they get for the starting sale's of the 30 billion in asset's that the goverment is making them sell.Last time ire got 1 full euro a share.If next thursday ire say's they get even .75 euro cent's that would put the stock at 4.28 in a flash.I went Long May 2 call's at .35 last firday when I read about the bailout.Two day later I noticed the ask was at .60.Zeeshan your lost in space.

  • Report this Comment On April 09, 2011, at 6:35 AM, Matt8265 wrote:

    Overreaction or ignorance by this author. AIB is toast. IRE and EBS will do just fine.

  • Report this Comment On April 09, 2011, at 7:44 AM, NOTvuffett wrote:

    I made some money on IRE, but the relative opacity of bank stocks' balance sheets and the guessing game of how government intervention will affect them makes them more trouble than they are worth in my opinion.

  • Report this Comment On April 09, 2011, at 10:12 AM, frec99 wrote:

    My concern is that his attacks on the Irish Banks are more than ignorance. It seems he might have an ulterior motive to drive down their prices by spreading fear. Perhaps he is "paid" by a 3rd entity to do so.

    An objective evaluation or analysis involves examining the pros and cons. In his articles he repeated the cons with exaggeration while conveniently bypassing the Banks potentials. Clearly he is biased.

  • Report this Comment On April 09, 2011, at 11:19 AM, Elbow5 wrote:

    This article is propaganda. Bank of Ireland is already under negotiation to sell an asset worth more than three billion euros. (They are only required to raise 4.2 billion euros --see their website. They have met the government requirements for tier 1 capital everytime. The only reason the government has a 36% stake in them now, is because when it came time to make their periodic payment to the Irish government, the Eurpoean commission forbid it, and forced IRE to give the government stock instead. IRE later went to court and challenged the EC, and the next time, they were able to make the payment, and avoid giving the Irish govt more stock, and paid them 200+ billion euros instead.

    Furthermore, IRE has sought investment from places like Dubai, but investors wanted to see how muh the European commission said they banks had to raise after their latest review before investing. Everytime IRE has met the tier 1 capital requirement, the EC has increased the amount required, making the Irish banks like dogs chasing their own tails. Other countries in Europe, that don't like to compete with the generous, and low Irish corporate tax rate, and the high dividends traditionally paid by the Irish Banks, have used this crisis and their political power to create a revolving door of tier 1 capital, first saying they needed to raise 8%, then 12% and now14%. These banks have not failed the tests,the EC has tried to make the tests impossible to pass. The EC has increased the capital requirements needed to pass the test each time, which forced AIB to end up in majority govt ownership. IRE, which has always been much healthier (it was just a year and a half ago, that the Irish Finance Minister called IRE a "very strong institution").

    IRE has met its capital requirements each time. Yet the Germans have complained continuously that the Irish were getting it too easy, and tried to make their aid contingent upon the Irsh govt and banks becoming less competitive, and more inline with their less generous standards. The 14% tier 1 capital requirement, according to AIB and IRE is going to leave both banks with several billion dollars in excess capital, according their estimates. AIB recently won the bidding for 11.9 billion dollars in Anglo Irish deposits, and is reported to be merging with the EBS. IRE and AIB are going to be the cornerstones of the new Irish banking system.

    And since when is government control ever good for business? That statement alone ought to discredit the author of the above rubbish.

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