Moody's lowers rating just as economy sees signs of growth
Published 18/12/2010 | 05:00
RATINGS agency Moody's lowered Ireland's credit rating by an unexpectedly steep five "notches" to Baa1 from Aa2 with a negative outlook yesterday.
Moody's managed to put the boot into Ireland just one day after economic data had showed the country beginning to climb out of recession.
The downgrade itself was expected after the agency began its review of the Irish state finances in October but waited until details of the Four Year Fiscal Plan and Budget 2011 were available before completing the review. Taoiseach Brian Cowen said the downgrade was "disappointing and excessive".
Mr Cowen challenged the finding by Moody's of a negative outlook for the Irish economy.
The Taoiseach said he believed the economy was stabilising and improving, citing the passing of the Budget, tax returns, the deficit being reduced, export increase and the first rise in both GDP and GNP in three years.
"What we are looking at is the real economy Ireland and what it is doing," the Taoiseach said.
Moody's lead analyst for Ireland, Dietmar Hornung, said the downgrade reflected the impact of bank losses that are being borne by the Irish state. He said it also takes account of increased uncertainty regarding the outlook for the Irish economy as austerity measures sap domestic demand for goods and services.
"The balance of risks is on the downside," Mr Hornung told the Irish Independent.
Moody's Hornung said, however, that the rating does take account of Ireland's strengths.
Ireland's rating remains in the higher calibre investment grade category -- unlike Greece, which has been downgraded to "junk", Mr Hornung said.
"There are strong credit positives in Ireland's favour including the economy itself and the commitment to fiscal discipline. Flexibility and competitiveness in the economy compares favourably to other countries on the European periphery," Mr Hornung said.
But, he said, the rating is based in large part on what it sees as Ireland's solvency issues.
He said the announced €15bn of cuts set out in the four-year plan will be a drag on the country's recovery prospects.
The downgrade comes even though the availability of bailout funds makes it extremely unlikely that Ireland could default over the next three to four years.
Moody's said the bailout provides liquidity to Ireland but does not tackle the underlying issues.
"It was certainly flagged that there would be a multi-notch downgrade but five notches seems a lot," said Davy's banking analyst Stephen Lyons.
"The fact that they've left Ireland on negative outlook is an issue as well." Mr Lyons said the most immediate impact of the downgrade would be the flight of a "subset of deposits", reflecting the weaker sovereign underpinning the bank guarantee.
The downgrades triggered another wave of share price plunges at Ireland's biggest banks, with Bank of Ireland falling 14pc and Irish Life & Permanent dropping 9pc. Shares in AIB now trade far less than the other banks and closed down just 1pc.
NCB's banking analyst Ciaran Callaghan, however, said the fall in deposits was likely to be far more muted than August/September downgrades which triggered billions of withdrawals.