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We are 'one false step away from junk' after ratings cut

Ratings agency Moody's cut Ireland's government debt rating by two notches to Baa3 yesterday.

The agency said the move was prompted by a worse than expected economic outlook and uncertainty for lenders created by the new European Stabilisation Mechanism (ESM), which will be in place from 2013.

Moody's analyst Dietmar Hornung told the Irish Independent that the agency believes the Irish economy will grow by just 0.4pc this year.

He said low growth, bailout costs, and the lack of credit in the economy coupled with rising interest rates mean the €15bn "adjustment" under the four-year national plan may not be big enough to get the deficit down to the 3pc target by 2015.

However, he does not think the Government will default and that Ireland is better placed than its peers to recover.

"Given the supply side strength, medium- to long-term prospects for Ireland compare favourably to its peers," he said.

The rating action will disappoint the Government because it comes just hours after rival agency Fitch took Ireland off "watch negative", an indicator it doesn't think a cut is on the way.

Bloxham Securities Alan McQuaid said the cut is disappointing, but it means there are now mixed views in Ireland after a period of near universal negativity.

"I think everyone recognised that we are not going to meet the deficit reduction target in the time frame set, especially if the ECB starts to raise interest rates further," he said.

The new Moody's rating places Ireland in the same 'mixed bag' as Iceland, Tunisia, Romania and Brazil.

Iceland has endured a worse economic crisis than ours, while Tunisia has been through a revolution. However, Brazil is one of the fastest growing economies in the world.

The latest cut takes the Moody's rating just one notch above "junk" bond status.

"It's possibly the most uncomfortable of places to be on the ratings scale -- one false step from junk," said Gary Jenkins, a bond market expert at Evolution Securities in London.


Moody's said it considers the outlook for the Irish debt to be negative, which means its analysts think a fall to junk is a likely prospect over the next 12 to 18 months.

Many funds that invest in government bonds are only allowed to buy bonds rated above junk status, in order to protect their own investors from losses and volatility.

Irish Independent