Debt rating sinks to its lowest in 14 years amid banking woes
Massive Anglo losses and bailout to blame for S&P's decision
Tuesday June 09 2009
STANDARD & Poor's cut its rating for Irish long-term debt to its lowest level in 14 years, blaming massive losses at Anglo Irish Bank and the likely cost of rescuing the nation's other banks.
The US agency lowered its rating for Ireland to 'AA' with a negative outlook, which suggests the country has a higher risk of defaulting than any other member of the eurozone, bar Greece and Slovenia.
The economy won't return to last year's levels of growth for another five years at least, and rescuing the two big banks could cost €25bn or €10bn more than S&P originally forecast, the ratings agency predicted yesterday.
Debt could, meanwhile, balloon to more than 100pc of gross domestic product from just 41pc last year, it added.
The Government's drumming in the local, national and European elections played no role in the downgrade, S&P analyst David Beers said. The last S&P downgrade led Taoiseach Brian Cowen to question what the rating agency knew about the Irish economy after it called for "new faces in government".
Currency traders said the news pushed the euro to a two-week low against the dollar yesterday morning. The last time the euro fell on Irish news was when voters rejected the Lisbon Treaty.
S&P last cut Ireland's rating in March. The move was swiftly followed by downgrades from rival rating agencies Moody's and Fitch and resulted in a sharp spike in borrowing costs.
Next week's National Treasury Management Agency's bond auction will give some insight into what the decision will mean for taxpayers this time.
The difference in yield, or spread, between Irish and benchmark German 10-year government bonds nudged up 3 basis points to 203 basis points yesterday. That is nine times the average over the last decade. The spread only moved late yesterday morning after S&P's announcement, suggesting that the election results did not dent investor confidence.
"Ireland has many, many problems and we continue to view it as the weakest fiscal risk in the European Monetary Union, but investors should not leap to the view that this is an Iceland in disguise," Royal Bank of Scotland strategist Harvinder Sian wrote in a research note after the downgrade.
Analysts
The views of overseas analysts are important for Ireland because most government debt is bought by foreigners. In other European countries, most debt is owned by locals.
The rating agency expects the Government to spend between €55bn and €75bn to buy land from developers as part of Finance Minister Brian Lenihan's plans to rescue the banks from insolvency.
Nobody knows the exact amount yet because the Government has still not said what it will pay for the land. The money will be raised through a series of bond issues.
- Thomas Molloy
