Monday 24 July 2017

Fitch downgrades Ireland on cost of banking bailout

Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction.

Ireland was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the bailout of the banking system.

The move comes a day after Moody’s Investors Service said it may cut Ireland's rating.

As much as €50bn may be needed to repair the financial system, pushing the budget deficit this year to 32pc of gross domestic product.

Fitch said the rating could be lowered again if the economy stagnates and political support for budgetary consolidation weakens.

“Ireland is at the lowest point, it shouldn’t get any worse,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said. “We’re not funding at the moment. We’re in a comfortable situation.”

The Government last month canceled bond auctions in October and November, saying the State is fully funded through the first half of 2011. Ireland has an Aa2 rating at Moody’s and AA- at Standard & Poor’s.

‘Last resort’

The yield spread between Irish 10-year bonds and those of Germany, Europe’s benchmark, widened to a record last month on concern that Ireland would become the first nation after Greece to tap the €750bn rescue fund set up in May by the European Union and International Monetary fund.

Christopher Pryce, a director at Fitch in London, said a bailout would be a “last resort” for the Government. The Government is “determined” to avoid the need for aid, as it may be conditional on the 12.5pc rate of corporation tax being increased, he said.

The euro fell 0.3pc against the dollar after the rating cut, dropping to as low as $1.3799. It traded at $1.3863 as of 1:15 pm in London.

Irish bonds pared their advance and the spread with German bunds widened to 422 basis points from 410 basis points yesterday. It reached a record 454 basis points on September 29.

Credit-default swaps linked to Irish Government debt rose 9 basis points to 446, according to data provider CMA.

Growth risks

So far there has been around €33bn injected into banks and building societies by the Government, including €22.9bn into Anglo Irish Bank.

Anglo may need up to an additional €6.4bn of capital and a further €5bn in the event of unexpected losses. Irish Nationwide may need a further €2.7bn.

Fitch said the “timing and strength” of the recovery is critical to reducing the budget deficit. While the economy is rebalancing, “ongoing distress” in real-estate markets and uncertainty over the global economic outlook “weigh on growth prospects and fiscal outlook,” it said.

Consumer confidence plunged the most in more than four years last month due to the mounting burden of bailing out Anglo and the surge in sovereign borrowing costs.

“Ireland has experienced a great panic,” said Austin Hughes, chief economist at KBC Ireland. There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.”

Bloomberg

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