It was just yesterday that we warned about mergers in the banks “Irish Style.”  The fear is that Allied Irish Banks plc (NYSE: AIB) and Bank of Ireland (NYSE: IRE) would be gobbled up by the Irish government or by European creditors in a merger that would have awful consequences for shareholders and creditors alike. The Irish stress tests came out Thursday and it looks as though Ireland is in the hole for another $24 billion for Allied Irish, Bank of Ireland, and the remaining wards of the state that has to be raised.

Where this money will come from is still an outstanding issue.  Maybe 24 billion Euros isn’t what it used to be, but this is still a massive sum.  What really hurt were comments today that more senior creditors in the capital structure would have to accept some haircuts as well.  This strikes at the heart of corporate governance and the laws which protect creditors and borrowers and it brings up direct fears from investors.  If a senior creditor can arbitrarily be wiped out with resolve, it spooks investors.

Is Ireland going to wipe out senior creditors or will they just continue to ask for concessions?  Unlikely.  Will senior creditors have to eat some bad bread?  Likely.  It seems that junior creditors will have to absorb more pain based upon the comments we saw today from regulators.  We will skim over the ramifications to keep this from becoming a doctoral thesis, but this is a part of what has led credit rating agencies to downgrade and warn of downgrades in the lands of the PIIGS in Greece, Spain, and Portugal.  Who really owns the assets ahead in the line of creditors?  Is it senior creditors or is it the latest agency willing to lend money regardless of the country of domicile?  Back to the banks in Ireland.

These funds have to come from somewhere.  No government entity wants these Irish banks on their books regardless of domicile.  Personally, it is hard to imagine that anyone regardless of who they are which would admit a formal dollar figure of how deep these black holes are.  So, who will step up?  Ireland, Greece, the IMF, the ECB, special EU branches?  Maybe all of them, maybe none of them.

If you think that these fears are without merit, look at how the stocks performed.  Allied Irish Banks plc (NYSE: AIB) closed down 6.6% at $2.40 and Bank of Ireland (NYSE: IRE) looks as though it did not reopen.

Our biggest concern is continuity of the equity value of these banking wards of the state.  Imagine a whole nation full of West Coast banks from the late 1980’s and early 1990’s.

It is hard for us to really understand how The New Ireland Fund, Inc. (NYSE: IRL) trades versus its real assets.  Shares closed down 0.13% at $7.64 today. It is a closed-end fund and Lipper shows that it has a -14% discount to its net asset value.  What the real value is, well we will leave that to them.

Our big question has been how legitimate these stress tests really are.  These stress tests assumed in the reports we read that deposit outflows would not continue.  Is that a safe assumption? If these banks get to survive as equity entities, will there be any assurances that this is the final-final capital deficiency raise?  I am too skeptical to answer that with a straight face.  How many bailouts and how many rescue packages have we really seen?  It may not really be thirty-seven, but it sure feels like it.  I’d rather go hunting for four-leaf clovers in Arizona before believing that not a single penny more is needed to remedy this situation.

A warning to creditors and citizens of a country that has always been enjoyed by yours truly… “Beware Bankers Bearing Gifts.”

JON C. OGG

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