Moody's says it may downgrade State's debt rating

RATINGS AGENCY Moody’s has threatened to downgrade the State’s debt rating if the Government’s finances deteriorate further. The news came as Eurostat said that annual inflation in the euro zone had fallen to 1.1 per cent, strengthening the case for further rate cuts.

The Republic of Ireland has become the first western European country, in the current downturn, to have its rating placed on a negative outlook by Moody’s.

The agency outlined three factors that would result in a downgrade of Ireland’s “AAA” rating – the highest available – over the coming year.

These include an erosion of the Irish “economic model” and a further significant weakening of the Government’s financial strength, possibly due to rising liabilities from the banking system.

Moody’s is also concerned about the capacity of the Government to maintain a ratio of debt to gross domestic product and debt affordability levels “at levels compatible with a AAA rating”.

The agency has lowered its outlook for the State’s debt rating from stable to negative.

Dietmar Hornung, Moody’s sovereign analyst for Ireland, said the decision was sending two messages: “The first is that Ireland’s AAA rating remains appropriate at this point. But, at the same time, we believe the global slowdown is likely to significantly affect Ireland’s economic strength and Government financial strength for the years to come”.

Although the Government’s attempts to secure €2 billion in spending cuts this year was important information for the market, he noted that, “The rating action we took speaks about the outlook for the next 12 to 18 months.”

One challenge facing the Government is its capacity to sharply curtail spending – and therefore the extent of its borrowing – is constrained as “the Government can only modestly raise taxes without risking further damage to its economic model”, Mr Hornung said.

The pronounced economic slowdown and severe correction in the housing market was “translating into a distinct reversal of public finance dynamics”, the ratings agency announced.

The Central Bank predicted on Thursday that Ireland’s gross national product would shrink by 4.7 this year, and unemployment would rise to 9.4 per cent.

The placing of Ireland on negative outlook comes as Ireland’s debt becomes the riskiest in the euro zone, surpassing Greece’s sovereign bonds, according to credit-default swap prices which measure the cost of insuring against default.

Contracts on Ireland rose to 269 by 5pm yesterday, according to CMA Datavision prices, while credit-default swaps on Greece’s debt fell to 248.2. A basis point on a credit-default swap contract protecting €10 million of debt from default for five years is equivalent to approximately €1,000 a year.

Moody’s noted the “sizeable indebtedness of households points to a particularly painful de-leveraging process”.

It maintained Ireland’s AAA rating because the country had entered the crisis in a relatively strong fiscal position and with low Government borrowings.

Moody’s is the second ratings agency to downgrade its outlook for the Republic, following a similar decision by Standard Poor’s two weeks ago that reflected “mounting fiscal pressures”.

However, a third agency, Fitch, affirmed Ireland’s “AAA” credit rating last week.