Ratings cut may be our last thanks to stress tests
Published 02/04/2011 | 05:00
Ireland suffered another crippling downgrade by a leading ratings agency yesterday, but it may be the last such move thanks to this week's bank stress tests.
Standard & Poor's cut Ireland's credit rating, but said this week's stress tests had "credibility" and were "within expectations'' at €24bn.
Ireland was cut to BBB+, a top rating, but far below the AAA rating held by countries like Germany, France, the UK and the US.
Standard & Poor's, which competes with fellow agencies Moody's and Fitch, indicated that future downgrades were now unlikely.
Ireland is in a better position now than Portugal and Greece, the agency argued.
"We believe the Irish economy has stronger growth prospects than the Portuguese and Greek economies considering its openness, its flexibility, and its competitiveness," it added.
Standard & Poor's said the shrinkage in the Irish economy was at an end. "The Irish economy is now set to gradually recover."
While many in the markets remain worried about how Ireland will repay all the money it owes the European Central Bank in Frankfurt, the agency was more relaxed about this, saying the money will gradually be repaid as banks sell off their assets.
The agency said it was clear that the banking system remained weak despite the scheduled capital injections.
"We do not expect that its earnings prospects (profits) will recover any time soon," it added.
The agency will now monitor our performance closely and if growth surges or the Government manages to sell a lot of NAMA assets, it may upgrade Ireland.
"The stable outlook reflects our view of the balanced risks to Ireland's creditworthiness," said the report written by analyst Frank Gill.
At present the agency is expecting growth in Ireland of about 2pc to 2.5pc per year. Equally if the Government does not stick to its budgetary plans, or the banks were to need more money, the rating could be lowered again.
The reason downgrades are so crippling is that they force many depositors to pull their money out of the banks.
Many corporate depositors cannot leave money in banks in countries with credit ratings below AAA or AA.
For example, in December 2008, there were corporate deposits in Irish banks worth about €103bn, but this had fallen earlier this year to €30bn.
But the Government is hoping that with more capital and support from the ECB the banks will start recovering some of these deposits.