Fitch is first agency to strip Ireland of 'A' credit status
Ratings agency warns that the Budget could forestall any recovery but downgrade has little effect on state bonds
FITCH yesterday became the first ratings agency to strip Ireland of its 'A' credit status, slashing the country's rating by three notches to BBB+.
It was the first reaction from a ratings agency to the Government's request for an EU-IMF bailout and Tuesday's Budget.
Fitch said that while Ireland had received relative security from the €85bn emergency funds, the fiscal costs of restructuring and supporting its banks had triggered the cut.
This is the lowest rating among the world's big three agencies, although both Moodys and S&P have warned of possible downgrades.
Fitch also warned that the budget cuts might choke the Irish economy, rather than reviving it.
"The scale and pace of the deterioration of public finances and continuing contingent fiscal and macro-financial risks emanating from the banking sector mean that Ireland's sovereign credit profile is no longer consistent with a high investment-grade rating," Fitch said.
The austerity measures, together with "accelerated bank deleveraging, could stall the incipient recovery".
The downgrade came on the same day that the Central Statistics Office revealed that unemployment was at a 14-year high, inflation was falling and the home builder Abbey described the future as "bleak".
The downgrade will undoubtedly make it harder for the Government and various state agencies to borrow when the country returns to the bond markets in two or three years.
However, it had little effect on 10-year government bonds yesterday. They fell immediately after the announcement but were soon trading higher.
"The reality is that these rating agencies are cyclical, they're a bit late on the ball," Brian Devine, chief economist at NCB Stockbrokers said.
"From any sort of credibility point of view, the market is already way ahead of them."
Fitch analyst Chris Pryce said the three-step cut reflected the "seriousness of the situation," although he did not expect Ireland to default.
It's "an investment grade rating. That doesn't mean we expect the country to default," Pryce said, adding: "There is obviously a chance, but that is not our main expectation."
The downgrade leaves Ireland two rating steps above Greece and just three steps above junk.
If Ireland's credit was downgraded to "junk status", funding costs would rise further as investors mandated to hold only highly rated bonds would be forced to sell.
"The key point is that the rating is still investment-grade and obviously Ireland needs to hold on to that," said Dermot O'Leary, chief economist at Goodbody Stockbrokers in Dublin. "It has to sort out the banking system."
(Additional reporting Bloomberg and Reuters)