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