Sovereign Debt Crisis Continued: Irish Banks

Ireland, home of Guinness beer and the band U2, now brings another export to the market: the continued sovereign debt crisis. As the European Union continues to grapple with its credit crisis, Ireland has recently been thrust right into the forefront of this fight, amid sovereign credit downgrades from both Moody's and Standard & Poor's. While the downgrades will mean higher borrowing costs for the Irish government, they also have a large effect on the nation's banking industry.

Known as one of Europe's financial trouble spots, Ireland's banks have been in a heap of trouble ever since the global recession began. In an attempt to revive its banking sector from its own housing bubble, the Irish government created a "bad bank." This bank, called the National Asset Management Agency, has been purchasing the toxic debt of Ireland's banks. While this effort has assisted banks such as Allied Irish Banks (NYSE: AIB  ) and The Bank of Ireland (NYSE: IRE  ) in getting debt off its books, it has also ironically turned out to inflict further hardship on these banks. Ireland's credit rating has been downgraded specifically because of NAMA.

Because of NAMA's recent support of Anglo Irish Bank Corp., Standard & Poor's lowered Ireland's credit rating from "AA" to "AA-" as well as affirmed a negative outlook on the country, meaning there is a possibility of further downgrades in the near future. This downgrade likely means losses for both Allied Irish Banks and The Bank of Ireland, since both hold large amounts of Ireland's debt. Also, NAMA will now have more difficulty raising funds to purchase toxic assets to revitalize the banks. Investors will be more hesitant to purchase Ireland's lower-quality bonds, and those that do will demand a higher yield. As if that weren't bad enough, the continued deterioration of sovereign credit throughout Europe means that the banks themselves will also likely face higher borrowing costs.

Until Ireland can straighten out its finances, investors should stay far away from Allied Irish Banks and The Bank of Ireland. Instead, consider Canadian banks such as Royal Bank of Canada (NYSE: RY  ) or Bank of Nova Scotia (NYSE: BNS  ) as the banking system in Canada is in much better shape. Irish banks are likely in for a long struggle to recover from the excesses of the housing bubble, and now even the government in Ireland may now be in financial danger.

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Gerard Torres has no beneficial interest in any of the companies mentioned in this article. The Bank Of Nova Scotia is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool disclosure policy is ready for some football.


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  • Report this Comment On September 11, 2010, at 1:45 AM, orestrus wrote:

    "Until Ireland can straighten out its finances, investors should stay far away from Allied Irish Banks and The Bank of Ireland. Instead, consider Canadian banks such as Royal Bank of Canada (NYSE: RY) or Bank of Nova Scotia (NYSE: BNS) a"

    When Ireland straightens it's finances, it will be too late to jump on IRE ship. Recently this stocked jumped to $20, and this will happen again.

    Why would a small investor want to buy Canadian banks?! You're looking at div's and very minimal appreciation in pps.

    If investors will follow your advice, they will never make GOOD money on the stock market.

    BTW, I love to follow Warrens advice :" Buy when there is a blood on the street". IRE is a very strong bank, and now is the time to BUY this bank for pennies

  • Report this Comment On September 13, 2010, at 8:15 AM, orestrus wrote:

    All in all I think this is a good example of a ridiculous article.

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