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Ireland rating cut two steps by S&P

Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the Government prepares to unveil a four-year deficit-cutting plan and contagion spread through the rest of the euro region.

The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement late yesterday.

Putting the rating on review for downgrade reflects the risk that talks on a European Union-led rescue may fail to stanch capital flight, it said.

S&P cut Ireland’s long-term rating to A from AA- and the short-term grade to A-1 from A-1+, the statement said. The reduction leaves its long-term grade five steps above Greece, which has the highest junk, or high-risk, grade.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked turmoil through the euro region as the Government hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system.

The extra yield that investors demand to hold Spanish 10-year bonds over German bunds yesterday surged to a euro-era record.

Irish welfare cuts of €800m are among the steps planned to narrow the deficit to 3pc of gross domestic product by the end of 2014, said a person familiar with the matter who declined to be identified because the plan is not yet public. The shortfall will be 12pc of GDP this year, or 32pc when the costs of a banking rescue are included.

Separately, Bank of Ireland may end up in majority state control as the Government injects more capital into the lender, two people familiar with the situation said yesterday.

Bank capital

The Government will seek to raise the core tier 1 capital levels of its banks to between 10.5pc and 12pc, the people said. RTE earlier reported the plan, without citing anyone.

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The euro, which dropped 1.9pc against the dollar yesterday, rose 0.3pc to $1.34 as of 7:40am. The yield on Ireland’s 10-year bond was little changed at 8.61pc after jumping 34 basis points yesterday.

While opposition political parties back the aim of reducing the deficit to the EU’s 3pc limit by 2014, labour unions are planning “mass mobilisation” in protest at the planned cuts, with a march in Dublin on November 27.

“It appears that the day of reckoning has arrived,” said David Begg, head of the Irish Congress of Trade Unions, the umbrella group for unions, which is organising the demonstration. “The Barbarians are at the gates.”

Days numbered?

Taoiseach Brian Cowen is racing to finish talks with the EU and the IMF as support for his government crumbles.

His Green Party junior coalition partners said two days ago that they will quit the government next month and independent lawmakers are threatening to block the 2011 budget, the first step in the four-year plan.

“The Government’s days are numbered,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

“What we are likely to see in the next fortnight is growing pressures on the opposition parties to abstain on the major votes and pass the budget for the sake of political stability.”

Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden.

Moody’s has an Aa2 long-term rating for the Government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

An Department of Finance spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.

EU officials estimate that a rescue package for Ireland may amount to about €85bn, according to two officials familiar with the talks.

The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on November 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, €35bn would be earmarked for banks and €50bn to help finance the Government.

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