Friday 20 October 2017

Anglo bailout a key factor in downgrading Government debt

Bank may need more support, says Moody's

Emmet Oliver Deputy Business Editor

The prospect that Anglo Irish Bank will need extra government assistance was among the reasons given yesterday by Moody's for downgrading Irish government debt.

The ratings agency, one of the world's 'big three' agencies, noted Ireland's "loss of financial strength'' and "substantial'' increase in debt levels. The agency said liabilities from supporting the Irish banks were now starting to crystallise and "Anglo Irish may need further support''.

Capitalising the Irish banks could cost €25bn, equivalent to 15.3pc of everything Ireland produces, said the agency. The agency said the uncertainty surrounding the final losses from the banks was putting pressure on the "Government's financial strength''.

Ireland was downgraded to Aa2 from Aa1.

The agency expects Ireland's debt levels to "stabilise'' at about 95pc to 100pc of GDP over the next two to three years. "Given Ireland's wealthy and flexible economy and its very high institutional strength, these debt levels are commensurate with an Aa2 rating.''

On the plus side, the agency said Ireland demonstrated an ability to adjust economically and the rating reflected Ireland's "ability to attract foreign direct investment''.

Negative

The agency's overall outlook has changed to stable from negative. "The rating agency now views the upside and downside risks as being evenly balanced at the current rating level,'' it said in a statement. "Today's downgrade is primarily driven by the Irish Government's gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,'' said Dietmar Hornung.

"The country has suffered a dramatic contraction in GDP since 2008, causing a sharp decline in tax revenue. The general government debt-to-GDP ratio rose from 25pc before the crisis to 64pc by the end of 2009, and is continuing to grow,'' he added.

Growth in future will be "below historical trend'' over the next three-to-five years due to the property crash and falling private sector credit.

Irish 10-year paper was trading at about 5.5pc yesterday, on the eve of an important auction of €1.5bn of fresh government debt.

Ireland is likely to sell the full allotment even after the Moody's move, according to ING -- a major European bank.

The sales "are likely to go well in line with the Portuguese auctions last week, given the large concession priced in," Wilson Chin, a senior debt strategist at ING Bank, said in a note. (Additional reporting by Bloomberg)

Irish Independent

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