Irish bonds up as Moody's signals Aa2 rating review
Basis points jump 13 to 6.28pc as growing bank costs make downgrade possible
Irish bond yields rose yesterday after Moody's placed Ireland on review for a possible downgrade. In response to the announcement, 10-year yields rose 13 basis points to 6.28pc.
Ireland had managed to knock over 50 basis points off the 10-year yield after its recent bank announcement, but the Moody's move meant some of these gains were given up, with Ireland re-entering the financial headlines.
Moody's placed Ireland's Aa2 rating on review, citing the growing costs of recapitalising the banks and the "clouded outlook" for the economy, particularly the domestic demand side. NAMA is also on review.
Moody's has been one of the most supportive of the three largest agencies, but its latest warning suggests a downgrade could be on the way because of the expanding levels of national debt. Ireland does not need outside help though, the agency says.
The country will run up a deficit of 32pc of GDP this year, one of the highest ever recorded, although the underlying position is far lower. Moody's said recent announcements meant that bank recapitalisation costs were higher by €10bn to €15bn.
The agency also said there was greater risk of weak growth prospects and new austerity measures would impact on domestic demand. "These weaknesses raise concerns about a much longer period of recovery and the implication for weaker government revenue," said the agency.
The agency's analyst, Dietmar Hornung, said Ireland's borrowing costs were becoming elevated and the interest burden was growing.
"Taking these three factors into account, Ireland is on a trajectory toward lower debt affordability over the next three to five years," said Mr Hornung.
Moody's will now take three months before deciding whether it will go for a downgrade, most likely by just one notch.
The budgetary path was going to be "challenging" said Moody's, as GDP growth looked sluggish and sovereign interest rates remained high.
Meanwhile yesterday, Ireland's largest company, CRH, was downgraded to BBB from BBB+ by Fitch, a rival of Moody's.
The agency said weak trading conditions and lower operating margins could prevent CRH's debt position from returning to 'BBB+' levels when the construction sector begins to improve. The downgrade had little impact on the shares.