No Luck for the Irish

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Brian Lenihan, Ireland's finance minister, recently said that the cost of providing support to the country's ailing banks won't require new borrowing by the government, at least in 2010. But that has done nothing to help out the Irish, who have seen their stock market plummet, their deficit surge, and their banks continually under the scrutiny of watchful eyes.

More banks, more problems
There's no question that Irish banks are in desperate need of capital. The Central Bank just announced that Anglo Irish Bank will need an additional $8.7 billion; that recapitalizing Irish Nationwide Building Society, a state-owned lender, will cost $7.4 billion; and that Allied Irish Banks (NYSE: AIB  ) may only find half of the $14.2 billion that it needs by selling assets abroad. The Bank of Ireland (NYSE: IRE  ) may just be the only institution that has adequate capital to meet the country's requirements.

The problem, especially with such a small economy, is that the government's fortunes and those of the banks are terribly intertwined. As banks need additional capital, sovereign risk concerns rebound, which in turn increases borrowing costs for both institutions and the federal government. Further fueling an already dire situation is an unemployment rate of 12.9% and an unexpected 1.2% decline in gross domestic product in the second quarter. With the bailout inevitably increasing and GDP decreasing, the budget deficit has now shot up to about 32% of GDP, which is more than 10 times the supposed 3% limit set on countries that use the euro as their currency.

The market follows
So far this year, Ireland's benchmark ISEQ Index has fallen by about 11%, Bank of Ireland has dropped by 52%, and Allied Irish Banks is down another 60%. Even non-financial sector stocks such as Covidien (NYSE: COV  ) and Elan (NYSE: ELN  ) are down over 14%, despite the fact that both do plenty of business abroad and are less tied to the overall health of the domestic economy.

The only small ray of hope (and this is a real stretch) is that Ireland's banks seem to be following the same path of other big-time institutions in the PIIGS region. National Bank of Greece (NYSE: NBG  ) and Banco Santander (NYSE: STD  ) of Spain are also both down big this year, despite their countries' efforts to increase revenue collection and slash public spending. Once the Irish eventually fulfill their bailouts, recapitalize all the banks, and get the motor running on the economy again, things could turn around in quite a hurry. That's obvious -- the bigger question is how long it will take to actually occur.

Do you expect Ireland's economy to finally grow in the third quarter? Let us know in the comment section below!

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.

Jordan DiPietro owns shares of National Bank of Greece. Covidien is a Motley Fool Inside Value pick. Elan is a Motley Fool Rule Breakers recommendation. The Fool owns shares of National Bank of Greece. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (16)

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 October 04, 2010, at 1:54 PM, macginty wrote:

    Yes Ireland will produce modest growth in the final quarter of 2010 and will again grow modestly in 2011 BUT only with the resilience and tough measures being implemented squarely and equitably throughout all sectors.

  • Report this Comment On October 04, 2010, at 4:36 PM, MAURIZIO400 wrote:

    who are we kidding?

    ireland is the poster child of the central bank, see what comes to those that do not agree with our all slaves policy...?

    theyr suffering are going to be long and dire...

    for everyone else to behold and beware.

    thou shalth not follow thy neighbourg example


    thou shall suffer likewise

  • Report this Comment On October 04, 2010, at 10:47 PM, 173Davinci wrote:

    Not in the 3rd quarter, not for a few quarters to come. However Ireland is no stranger to austerity (minus the last decade). They know how to buckle down. It is still a tax haven should there be any companies to take advantage. National personality is always upbeat. English speaking, well educated workforce, first stop off transatlantic flights, great infrastructure, great attitudes. Technologically advanced. Dont underestimate. Bank of Ireland was grandaddy of conservative practices minus last 5 years, heading back that way, dont underestimate....

  • Report this Comment On October 04, 2010, at 10:52 PM, 173Davinci wrote:

    Addendum to above: current government needs to admit crime of all bank guarantee prior to knowing all owed and step down.

  • Report this Comment On October 04, 2010, at 11:23 PM, jalcorta wrote:

    I have been buying and selling stocks for the 18 months, my YTD profits are in the order of +29%, even that in the past I had some VW stocks, my experience with Europe is very limited. But when I saw the AIB ADR on the 40's cents I felt magically attracted. The stock jumped to 64 cents next day, but I could not sell because the settlement time. I have been reading about the bank, something interesting is the Assets that AIB has around the world. Just for MTB bank in USA they are going to get 2.5 billions US Dollars. In my experience the rebound should be very aggressive in a very short period of time 4 to 12 weeks. But the difference with BAC o C is that the country and government are very strong and the bailout is relatively small compare with the US economy. Having AIB with only 1 Billion common stocks, I know equivalent to 2 Billion ADR, just because the sell of MTB the contribution per stock is 1.25 us dollars. Very close to the 1.35 us dollars of the ADR. The Balance Sheet is still positive, even though the 2Billions euros lost. (year to date), I am not sure about this data. But those lost are related with the real state division, which sounds extraneous for me, I mean late for the wave of 2009. Any way, the bailout have shown that the money is totally payable in a very short period of time, the reason is that the prices of real state rebounds after touch the bottom. Any way, I think the real price of this ADR is 2.35 us dollars versus the 1.35 usd (Current Price).

  • Report this Comment On October 05, 2010, at 1:25 PM, EuroBob7 wrote:

    The problem is as follows - controlling the public sector deficit and the banks needs judgement. Too harsh and too much money gets sucked out of the economy so no growth. Too lenient and the EU will go berserk over the size of govt deficit. Either way the current administration are dead men walking. In the end once the world economy rebounds Ireland will too as it is the most open economy in Europe.

  • Report this Comment On October 06, 2010, at 2:10 AM, wisacre wrote:

    Ireland oversold maybe. Resource is workforce and business environment EU country which speaks American. First boom was always going to be exhuberant. Numbers are big though.

  • Report this Comment On October 07, 2010, at 3:36 AM, seagulls12345 wrote:

    Sorry to say that this is only the tip of the ice berg. Banks in crisis..manufacturing running at a low not seen sice the early 80's, house prices down on average 37%. Quite frankly the december budget is only a knee jerk reaction, next year will reveal the true crisis. We just don't have the infrastructure here or ANY confidence in the government. It's nothing short of a shambles. The issues refered above in Greece are somewhat different than ours..for a start, nearly 75% of greeks are self-employed and for their government to claim taxes must be a logistical nightmare.Greeks are getting away with it, paid for by the EU, they may look poor, trust me, they 'aint.

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