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Dan White: Q: What does a bank's rating have to do with you? A: Everything

The decision by ratings agency Standard & Poor's to cut its ratings on most of the Irish banks including AIB, Bank of Ireland, Anglo Irish and Ulster is bad news for borrowers. This is the third time that S&P has cut the ratings of the Irish banks since the banking crisis first struck in September 2008.

So why should the ordinary man in the street worry when the banks have their credit ratings cut? Surely this is something of interest only to professional investors?

Wrong. The lower a bank's credit rating, i.e. the bigger the perceived risk that it won't be able to repay its debts, the more it must pay to borrow money from other banks.

With the Irish banks relying on the ECB and other banks, rather than old-fashioned retail deposits, to fund more than half their loan books, a further reduction in their credit ratings makes it more expensive for them to borrow the money that they need to lend to their customers.

What this means is that, despite official ECB interest rates being at the historically low level of just 1pc, the gap between what the Irish banks pay to borrow money from other banks and what they earn from that money when they lend it to their customers has been steadily narrowing for the past 18 months.

Already Permanent TSB, which funds two-thirds of its loan book from the inter-bank market, put up its mortgage rates by 0.5pc last July.

Most analysts expect it to jack up its rates by a further 0.5pc over the next few weeks.

While none of the other Irish-owned banks followed the Permo's example last July, it will almost certainly be a different story this time around. As soon as they have offloaded most of their bad loans on to NAMA, expect AIB and Bank of Ireland to increase most of their interest rates by at least 1pc.

And that won't be even the half of it.

In its report downgrading the Irish banks yesterday, S&P warned that they would end up writing off a total of €37bn of bad loans in the three years to the end of 2011.

So far the banks have owned up to less than €20bn of these bad loans. This will push up the cost of recapitalising the banks, which currently stands at €11bn, with S&P estimating the total cost could eventually reach €25bn.

In other words, at the same time as they are being hit by the banks in the form of higher interest rates, borrowers will also find their tax bills increasing to fund the cost of pumping fresh capital into our bankrupt lenders.

Ironically NAMA, which the Government originally hoped would help keep down the cost of bailing out the banks, is likely to make the situation worse in the short term as it forces the banks to own up to the full extent of their loan losses, something which they have avoided doing up to now.

This combination of dearer loans, even before the ECB starts pushing up official eurozone interest rates later this year, and the higher taxes which will be needed to help meet the cost of bailing out the banks, confronts borrowers with the prospect of a double whammy.

The latest ratings cut should serve as a reminder to us all that, far from having bottomed out, the Irish banking crisis will almost certainly get even worse before it starts to get better.


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