Moody's downgrades bank bonds to junk despite belief in package
RATINGS agency Moody's yesterday downgraded Irish bank bonds to junk, even though the agency believes the banks are "unlikely" to run out of money because they need more than the €35bn provided in the EU/IMF package.
Moody's senior analyst Ross Abercromby also confirmed his agency was "not incorporating any imminent burden-sharing" with senior bondholders or any delay in injecting the €24bn recently promised to the banks.
Despite those views, Mr Abercromby's team yesterday downgraded debt instruments of AIB, Bank of Ireland, EBS and Irish Life by two notches to so-called 'junk' status.
The ratings agency also relegated the deposit rating of all four banks to 'junk', though the impact of this will be muted since most ratings-sensitive deposits would have left the banks months ago when they slipped to A.
The move came as another ratings agency, Fitch, said Ireland's economic crisis had been the worst in any advanced economy for over 60 years, but that it believed the Irish government was solvent.
In a detailed note, Moody's attributed the bond rating moves to the "high level of uncertainty around whether the government would extend further support to the banking sector if required [beyond the €35bn]."
Asked if he thought the banks would require more than the €35bn, Mr Abercromby said: "We think that's unlikely."
He also stressed that lowering of the ratings did not suggest that Moody's believed the Government was preparing to inflict haircuts on those bonds.
Mr Abercromby said the ratings agency was working on the basis that the promised capital would go in "fairly shortly".
"If it hasn't gone in within the next few months, we'll have to look at things again," he added.
Yesterday's ratings action also affected the four banks' deposit profiles.
Mr Abercromby added that banks were "unlikely" to "get into term funding again until the sovereign is issuing" but may be able to access "short-term funding before then".
The bank's standalone ratings were unaffected by yesterday's actions, leaving Bank of Ireland's long-term rating Ba2 (the second highest non-investment grade) and the other three banks one mark lower at Ba3.
Mr Abercromby said that Moody's still saw some "possible further downside risk".
"If deleveraging [the planned sale of about €70bn of assets] goes at a slower rate, or if the market deteriorates beyond the stressed scenario and the bailout isn't enough, then the outlook would worsen," he added.
Meanwhile, Fitch said the IMF/EU deal set out a credible path back to fiscal solvency and was based on a reasonable set of assumptions.
The agency said that reducing the debt-to-GDP ratio was the key to restoring confidence in Ireland as a borrower. The rating agency said the Irish economy had shrunk by 24pc since the top of the boom, a fall so severe that it was "unprecedented for an advanced economy" in the post-war period.