Thursday 22 February 2018

Moody’s cuts Irish credit rating

Moody’s Investors Service has cut Ireland's credit rating by one level, citing a "significant loss of financial strength" and the cost of bank bailouts.

The agency lowered Ireland to Aa2 from Aa1 and moved the country to a “stable” from a “negative” outlook, it said today in a statement.

Ireland lost its top rating at Moody’s in April 2009. Irish bonds fell after the downgrade and the euro extended its decline against the dollar.

The euro has fallen 10pc versus the dollar this year on concern that widening budget deficits in countries including Ireland, Spain and Greece could lead to a default.

While Finance Minister Brian Lenihan said last week that the country’s fiscal position is “stabilising” after the Government cut state workers’ pay and raised taxes, the cost of aiding the banking industry is adding to pressure on the public finances.

“Ireland is one of the countries which are currently under stress, but that are likely going to benefit from a recovery,” said Silvio Peruzzo, an economist at Royal Bank of Scotland in London.

“The rating is probably just a catch-up process towards ratings that are more aligned with the underlying fiscal policy fundamentals. It’s not going to change how markets look at Ireland.”

The euro declined as much as 0.3pc to $1.2871 after the downgrade before recovering. It was little changed at $1.2931 as of 8:21am in London.

The premium investors charge to hold Irish 10-year debt over the German bund, Europe’s benchmark, widened 10 basis points to 293 basis points today.

The yield reached 306 points in May, the widest since the introduction of the euro in 1999.

Bond auction

“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength,” Dietmar Hornung, Moody’s lead analyst for Ireland, said in the statement.

He also cited “contingent liabilities from the banking system,” which include setting up NAMA to buy toxic loans from lenders.

Oliver Whelan, the head of Ireland’s debt agency, said the move “wasn’t surprising” as Moody’s had the country on a “negative” outlook.

He doesn’t expect the downgrade to affect this month’s bond auction, he said in an interview on RTE Radio.

The Government plans to sell as much as €1.5bn of six- and ten-year debt at an auction tomorrow.

“While Moody’s expects the near-term deterioration in the government’s debt metrics to be severe, the ratings agency nevertheless expects the general government debt-to-GDP ratio to stabilise at 95pc to 100pc over the next two to three years,” it said.

Moody’s also said that this is “commensurate” with the Aa2 rating “given Ireland’s wealthy and flexible economy and its very high institutional strength.”

Ireland has an AA rating at Standard & Poor’s and a AA- rating at Fitch Ratings.


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