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Irish Debt: Is it in Ireland's Interest to Default?
(By Rebecca Lipman)
Markets rallied around the rumor that Greece would be allowed a "ring fenced" default. This is a surprising reaction given that the "political elite" spent months warning any default would bring unforgiving and widespread consequences to the financial markets.
David McWilliams of the Irish Independent provides an explanation for this counterintuitive market reaction. He points to historical data in which perceived risks from bank-to-bank lending increased just prior to the Lehman crisis and deflated just afterwards.
The reason risk deflation happens after a crisis, even when it is financially damaging, is that the financial market has no memory. "They are driven by the opportunity tomorrow rather than by recrimination for yesterday. What happened, happened and move on." The loss is simply accepted, if not reluctantly.
Perceived risk on banks in Europe are up again due to worry of Greece's default and the ability of banks tied to the crisis (nearly all) to repay loans to fellow banks. The perceived risk increase looks very similar to the weeks leading up to the Lehman crisis. McWilliams argues that the market's reaction in the past couple days from ringed default rumors proves banks are ready to cut their losses and move on, just as they have before.
The reason the European Community is not allowing this to happen, he says, is simply an unwillingness to accept varnish on their reputation as a "prestigious" and trustworthy economic superpower. "The markets, on the other hand, worry about future return, not past prestige."
Very interestingly, McWilliams goes on to argue that Ireland, which has been hailed for its decision to pay all debts, "makes the country riskier, not less risky. The lesson we have to take from the European financial markets of the past two days is quite simple: if Mr Noonan walked away from paying the next tranche of Anglo bondholders, the market in Ireland would rally."
Money spent paying back debts goes nowhere, he argues. Had it been used to invest in furthering the country's infrastructure or school systems it would have more viable long-term results. "In fact, [debt repayments] will retard productivity growth because it will have to be paid by higher taxes in the next generation."
He concludes by saying, "we need a massive change at the highest level in Europe to rescue the situation and this demands facing up to the world as it is, not the world as we would like it to be."
Do you agree with McWilliams on the impacts of Ireland's decisions?
To help you explore this theory we list below the ten largest Irish companies traded on US markets.
Do you think these names will suffer in the wake of their decision to repay debts or will they be better off? Use the list below as a starting-off point for your own analysis.
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List sorted by market cap.
1. Accenture plc (ACN): Management Services Industry. Market cap of $36.54B. Price as of 10/03 at $51.62. Operates as a management consulting, technology services, and outsourcing company. The company has operations in approximately 200 cities in 52 countries and operates in five segments: Communications & High Tech; Financial Services; Health & Public Service; Products; and Resources.The stock has gained 18.39% over the last year.
2. Covidien plc (COV): Medical Instruments & Supplies Industry. Market cap of $20.95B. Price as of 10/03 at $42.45. Develops, manufactures, and sells healthcare products for use in clinical and home settings in the United States and internationally. The company operates its businesses through three segments, including Medical Devices, Pharmaceuticals, and Medical Supplies. The stock is currently stuck in a downtrend, trading -10.33% below its SMA20, -12.76% below its SMA50, and -16.32% below its SMA200. It's been a rough couple of days for the stock, losing 8.06% over the last week.
3. Ingersoll-Rand Plc (IR): Diversified Machinery Industry. Market cap of $8.76B. Price as of 10/03 at $26.48. Engages in the design, manufacture, sale, and service of a portfolio of industrial and commercial products in the United States and internationally. The company provides products, services, and solutions for the quality of air in homes and buildings, transport and protect food and perishables, secure homes, and commercial properties. The stock is currently stuck in a downtrend, trading -18.74% below its SMA20, -18.6% below its SMA50, and -38.58% below its SMA200. It's been a rough couple of days for the stock, losing 18.8% over the last week.
4. Ryanair Holdings plc (RYAAY): Regional Airlines Industry. Market cap of $7.44B. Price as of 10/03 at $25.41. Through its subsidiary, Ryanair Limited, the company operates a scheduled-passenger airline serving short-haul, point-to-point routes between Ireland, the United Kingdom, Continental Europe, and Morocco. The stock has lost 17.69% over the last year.
5. Elan Corp. plc (ELN): Drug Delivery Industry. Market cap of $5.81B. Price as of 10/03 at $9.87. Operates as a neuroscience-based biotechnology company primarily in Ireland and the United States. The company operates in two segments, BioNeurology and Elan Drug Technologies (EDT). The stock has gained 78.16% over the last year.
6. Seagate Technology PLC (STX): Data Storage Devices Industry. Market cap of $3.98B. Price as of 10/03 at $9.49. Designs, manufactures, markets, and sells hard disk drives for the enterprise, client compute, and client non-compute market applications in the United States and internationally. Might be undervalued at current levels, with a PEG ratio at 0.79, and P/FCF ratio at 9.45. Offers a good dividend, and appears to have good liquidity to back it up--dividend yield at 7.59%, current ratio at 1.86, and quick ratio at 1.6. The stock is currently stuck in a downtrend, trading -15.19% below its SMA20, -19.% below its SMA50, and -32.73% below its SMA200. It's been a rough couple of days for the stock, losing 15.57% over the last week.
7. The Governor and Company of The Bank of Ireland (IRE): Foreign Regional Banks Industry. Market cap of $1.26B. Price as of 10/03 at $0.95. Provides banking and other financial services to small and medium-sized commercial and industrial companies in Ireland and internationally. The stock is currently stuck in a downtrend, trading -12.4% below its SMA20, -20.86% below its SMA50, and -44.92% below its SMA200. It's been a rough couple of days for the stock, losing 11.21% over the last week.
8. Velti Plc (VELT): Business Software & Services Industry. Market cap of $396.38M. Price as of 10/03 at $6.44. Provides mobile marketing and advertising solutions for mobile operators, ad agencies, brands, and media groups. It has operations in Europe, North America, the Middle East, and Asia. The company was founded in 2000 and is based in London, the United Kingdom. The stock is currently stuck in a downtrend, trading -14.54% below its SMA20, -39.36% below its SMA50, and -53.37% below its SMA200. It's been a rough couple of days for the stock, losing 12.26% over the last week.
9. FLY Leasing Limited (FLY): Rental & Leasing Services Industry. Market cap of $291.94M. Price as of 10/03 at $10.93. Operates as a global aircraft lessor. The company's aircraft are leased under long-term to medium-term contracts to a group of airlines worldwide. Its primary markets include Europe, the Middle East, and Africa; the Asia Pacific; North America; and Mexico, South and Central America. FLY Leasing Limited is headquartered in Dublin, Ireland. The stock has lost 9.74% over the last year.