NEW YORK - The recent announcement of a possible Irish bailout of Ireland sent bank stocks soaring. Allied Irish Bank soared nearly 100% from a low of 76 cents and Bank of Ireland soared 33% yesterday but what has changed?
1 week ago it was believed that Ireland would likely be able to fund itself and this means that the banks would be funded by Ireland. Ireland announced its National Asset Management Agency in mid 2009 where the country would buy bad assets off the books of Irish Banks and the government would become essentially a bad bank. The government is the only institution in the world that can hold investments on its books for a very long amount of time "without" repercussions. Well that was the plan but unfortunately NAMA and the Irish economy has forced Ireland to consider a European bailout and the country like its banks are suffering from having to much debt.
But who Bails Out the Bailer Outer?
Bank of Ireland and Allied Irish Banks stock have declined substantially over the last year because of the discount on its NAMA loans and the sternness of the government. If Europe were to give Ireland a bailout there will be two governments overseeing its banks instead of one. All of the same restrictions that plagued the banks beforehand will still exist.
The second issue is the fact the government has been trying to stimulate the economy by buying these assets from the banks a European bailout won't exactly change anything it will just allow the government to continue these initiatives. In the long run this will be an improvement for Ireland, and its banks but that doesn't mean anything will improve for the common shareholders. Even if the long run future of Ireland improves substantially because the governments will likely try to force massive recapitalizations during these tough times it means that the shareholders will likely face heavy dilution.
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