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These days the only green in Ireland seems to be in the rolling country hillsides. The Emerald Isle has become the latest trouble zone in the eurozone’s ongoing fiscal nightmare, as problems at one of the country’s largest banks threaten to reignite concerns over the financial stability of the entire region. After meeting with EU officials, Irish Finance Minister Brian Lenihan announced this week that Anglo Irish Bank (OTC:AGIBY), the third largest bank in Ireland, would be split into two parts: a government-backed bank that would hold customer deposits and an “asset recovery bank” that would hold the institutions bad loans.

The move had become necessary as worries over the health of Ireland’s financial system had popped up. Prior to the announcement, investors were clearly spooked on the outlook for Ireland, perhaps in part due a report earlier this week that called into question the thoroughness of “stress tests” to which European banks had submitted. The price of insurance against a default of Irish government debt briefly spiked to a new record on Wednesday, but word of the new guarantee acted to soothe nerves. Still, anxiety over the ability of the country to move forward is running high.

The restructuring is the latest blow for an economy that many believed had enacted fiscal discipline in time to avoid a Greece-like collapse. Ireland was among the first countries in Europe to impose harsh austerity measures, slashing public spending in order to reverse a widening budget deficit several years ago. But because so much of the country’s economic expansion in recent years was fueled by a construction boom that has now ground to a halt, the percentage of bad loans on the balance sheets of Irish banks has proven to be significant. And investors are becoming increasingly worried that another euro zone bailout is ahead. “Ireland’s renewed banking problems are sparking fears that the European Union’s rescue of debt-laden Greece won’t be its last” writes Neil Shah.

But not all the news out of Ireland has been bad. Despite all the issues swirling around the financial sector, the country apparently isn’t yet facing a funding problem. Ireland raised €400 million this week by issuing six-month and eight-month government bonds to investors in Europe’s bond markets at interest rates of 1.925% and 2.19%, respectively. Those yields are lower than the rates paid during a previous sale in late August, suggesting that the outlook for Ireland has improved slightly in the last month or so.

“Now, some analysts may worry that Ireland sold so small a slug of debt – 400 million euros is at the low end of the 400 to 600 million euro range Ireland has been targeting at bill auctions,” writes Neil Shah. “Others may say the European Central Bank is artificially boosting the market by stepping in and buying old euro-zone government bonds.” Still, Ireland is well ahead of schedule in its 2010 borrowing campaign, affording it some flexibility to complete the remainder of debt issues when conditions are deemed more favorable.

Ireland ETF In Focus

One of the most recent additions to the ETF landscape offers exposure to the Irish economy; the iShares MSCI Ireland Capped Investable Market Index Fund (NYSEARCA:EIRL) invests in about 25 of the largest companies listed on stock exchange in Ireland. The financial sector accounts for a relatively small portion of EIRL’s holdings–about 14% of assets–but other sector weightings potentially pose a problem. EIRL has a heavy tilt toward industrial materials firms that may need a rebound in construction activity to thrive; this industry accounts for about 30% of assets.

The Ireland ETF has been battered in recent weeks and this fund figures to have a rough road ahead if the country’s banking sector continues to sputter. EIRL has been slow to gather assets, so trading in this ETF with a straight market order could be a bad idea. (Click to enlarge)

Disclosure: No positions at time of writing.

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Source: Is the Ireland ETF in Trouble?