Moody's warns on possible AAA ratings downgrade

THE GOVERNMENT has been warned that it faces the threat of a cut in its top AAA rating by a third debt ratings agency as it prepares to raise a further €1 billion to help meet the growing budget deficit.

Moody’s warned yesterday it may downgrade the rating on Irish Government debt within three months, due to concerns about the deterioration in the public finances and the State’s capacity to repair the banking sector.

Two other major credit ratings agencies, Standard Poor’s and Fitch, have cut Ireland’s top credit rating over the past three weeks.

The Government’s debt manager, the National Treasury Management Agency (NTMA), said it hoped to raise up to €1 billion on Tuesday selling two bonds which must be repaid in 2014 and 2018.

The bonds will be sold to investors through public auctions and are likely to bring State borrowing this year to €12 billion, roughly half the record €25 billion required this year to shore up the Government’s finances.

Moody’s said the possible downgrade of the State’s rating “reflects the severe economic adjustment taking place in Ireland, which threatens to undermine the country’s low-tax, financial services-driven economic model”.

The agency said Ireland had lost “both economic and government financial strength relative to its AAA peers over the past year”.

Moody’s acknowledged the Government was being “proactive” in trying to restore economic and financial stability but the “room to manoeuvre is limited at this point”.

The creation of the National Asset Management Agency (Nama), which will buy up to €90 billion in bad property loans from the banks, will have “only a limited impact” on the State’s debt, but the banks’ liabilities “significantly exceed earlier estimates”, Moody’s said. The credit ratings agency said it could downgrade Irish sovereign rating to the mid- to high-AA rating range, in line with its rivals, if it concluded the State will emerge from the crisis with relatively weak growth prospects and a much higher debt burden.

The NTMA said that, despite the warning from Moody’s, it expected to pay investors less for new funding on Tuesday than it did in last month’s bond auction.

Anthony Linehan, deputy director of funding and debt management at the NTMA, said there was a growing risk appetite generally among bond investors. “There is plenty of demand out there at the moment, not just for Ireland but generally,” he said.

Bond analysts have said that investors have already priced in the higher risks associated with Irish debt and a fall in the State’s credit rating, mitigating the effect of Moody’s warning yesterday.

The NTMA plans to sell bonds on the third Tuesday of May and June, trying to raise €750 million to €1.25 billion at each auction.

The cost of servicing Government debt rose yesterday, though so did German sovereign debt, reflecting higher concerns among investors about the health of some countries in the euro zone.

The economy could see its historically low levels of debt climb to more than 100 per cent of gross domestic product as the Government cleans the banks of toxic property development loans.

The difference in the cost of repaying Irish debt compared with that of Germany has narrowed in recent weeks. The cost of protecting investors from a default on Government debt through credit default swaps, a proxy measure of financial risks, has also fallen.