Ireland - Which Way is Up?

Ah, the daily grind of trying to interpret just how screwed Europe is.  Forget another warning on Greek debt, forget shots across Portugal's bow, forget increased funding costs for Spain - lets just address (for the time being) the luck 'o the Irish.


Headlines ripping across saying the ECB has warned that junior creditors will be eating losses on AIB sub debt (except them, of course as sub debt has been used for loan collateral).  Then, a little while later we see a story that Ireland's desire to force pain on junior creditors might be unconstitutional.


Confused?  So am I.  Houston, we've got a problem here.  If the banks are, essentially, insolvent, junior creditors should get hit.  Ireland wants to ensure they will.  Problem number one is that the ECB will get hit too.  See, if your collateral for loans gets whacked, there has to be a margin call.  Who in Europe is going to pony that one up?  Second problem is the whole notion of constitutional.  No problem here, we (the US) subverted our constitution when the govt (administrative branch) stole GM and Chrysler from creditors, essentially creating a sub-rosa bankruptcy plan (I wrote on that a long time ago here: chrysler-a-sub-rosa-by-any-other-name).  Constitution, we don't need no stinking constitution.   


Bottom line: Its going to be interesting and the WHOLE Euro region is going to continue to come under pressure in debt and currency markets.  I would sideline here, maybe look for cheap - but solid - debt and equity stories, for high beta, maybe some T1 or LT2 debt.

(Reuters) Ireland risked a fresh complication to radical plans to overhaul its financial sector on Tuesday with a controversial new banking law facing a possible constitutional veto by the country's top court.

The legislation gives the state wide-ranging powers to restructure the banking industry as part of an 85 billion euros ($112 billion) EU/IMF bailout package.

But its scope has raised objections from the European Central Bank (ECB) and opposition politicians, who warned it will make Finance Minister Brian Lenihan a "one-man legislature.

President Mary McAleese has held off signing the bill into law amid until she hears advice about its constitutionality on Tuesday from the Council of State, a panel of top political figures including the prime minister, attorney general and High Court President.

She will then decide whether to ask the Supreme Court to rule if the law or parts of it is constitutional, a move which could delay plans by government for junior creditors in Irish banks to swallow losses on their investments.

Her decision is expected later on Tuesday or Wednesday. The cut-off date for her to either sign the bill or send it to the court is Thursday.

But today we also read (again from Reuters):

Allied Irish Banks' junior bondholders will have to take a big hit in a future restructuring, the European Commission warned on Tuesday as it rubber-stamped billions of euros in state aid for Irish banks.

Brussels' threat triggered a fall in Irish sovereign debt, stoking fears the continuing financial crisis means more pain, including the spectre of forced discounts for investors, despite an 85 billion euro ($112 billion) EU/IMF bailout.