Moody's Cut on Ireland: Opportunity Rather Than Caution (AIB, IRE, IRL)

After Moody’s downgraded Ireland, there may be more of a buffer ahead in place than additional negative catalysts working against its two key banks of Allied Irish Banks plc (NYSE: AIB) and The Bank of Ireland (NYSE: IRE).  The downgrade announced Monday actually had no new information and you have to wonder if the ratings agencies are still considering the hanging-chad issues for US elections.  In short, the downgrade is late and gives no new insight into a troubled situation that may be full of opportunity.  The move in The New Ireland Fund, Inc. (NYSE: IRL) seems to highlight this counter-cut belief.

The Moody’s downgrade was only one-notch down to “Aa2” and is right ahead of a planned Irish government debt auction of about 1.5 billion Euros.  This is actually on the heels of what had been a resurgence of demand for investors buying debt from E.U. countries at a higher spread with an implied guarantee that some believe is in place.  The reason for the opportunity to be a consideration is that the outlook is now stable from having been negative.  In short, today’s downgrade was effectively telegraphed ahead of time and there should now be no ongoing reviews for additional sovereign debt downgrades for some time.

The wild card remains whether there is a double-dip recession in Europe and then in the U.S.  If no double-dip recession comes, today’s weakness will have likely represented one incredible buying opportunity in Ireland’s two large banks with ADRs in the U.S.

Moody’s is now looking for growth of 2% to 3% rather than 4% previously noted.  In the new normal and after what we have seen elsewhere in Europe, that level still seems decent.  The government’s austerity measures are still an outstanding issue and whether  or not voters accept the measures is still unfinished business.

Ireland is still considered an opportunity by many.  There is a stable government considering the woes of Europe.  It is English-speaking.  It has a younger population than many of Europe’s larger and firmer nations.  Deals can be made for new companies seeking to open new facilities.  The infrastructure is now rather new compared to its past and compared to many other of the second tier Euro nations.  It seems that the country also has its debt maturities and financing in place to get into 2011 without having to worry about each round of new debt offerings.

There are still risks.  Ireland has a burst housing bubble.  Its government budget deficit is around 14% after a banking bailout and the nation will likely be unable to meet a 3% target by 2014.  The downgrade may make the cost of borrowing greater this week and spreads are reportedly about 300 basis-points higher than bonds.  It is similar to California’s situatution.  Some of the tax moratoriums have ended and companies have left to seek cheaper labor and cheaper costs of operations in other countries.  Ireland is still dealing with its own bank bailouts. and business conditions have not yet recovered.  Its labor laws are considered tougher than most English-speaking nations.

The woes of the Irish banks may not be over.  The sector is under a bailout environment.  The ADRs of the large Irish banks may still be priced at attractive enough of levels to weather the storm.  Allied Irish Banks plc (AIB) is down 0.4% at $2.27 but still has a 10% cushion before taking out new year lows as the 52-week range is $2.06 to $10.42.  The Bank of Ireland (IRE) is down 3% at $3.48 but also has that 10% cushion before new lows with a 52-week range of $3.10 to $20.18.

If there is a double-dip or if these austerity measures turn out to be a sham, then the call for some opportunity being in place for these down-and-out banking ADRs is going to bring at least some pain.

We have also seen a drop of 10% to 15% in recent days in these two ADRs.  The news behind this very late debt downgrade feels like the news should probably just be considered a line-item with no bite behind it.  The New Ireland Fund, Inc. (IRL) is actually up 1.8% at $6.22 on active volume for such a thinly traded fund.

JON C. OGG