ANALYSIS:IT WAS not the smartest response by the Government's debt management agency, the National Treasury Management Agency (NTMA), to a further cut in Ireland's credit rating by international appraisers.
Publicly challenging not only the views of a credit rating agency but its methodology is rare, if not unheard of, in financial markets.
“It is very difficult and probably unwise to fight the market,” said one economic commentator who added that it also brought the issue further into the spotlight.
The reasons for Standard & Poor’s (S&P) downgrade – rather than the downgrade itself – and putting Ireland on negative watch (meaning a further ratings cut is likely) is what has brought the agency out fighting.
S&P blamed substantially higher costs to support our struggling financial institutions, namely Anglo Irish Bank, and the cost of buying impaired loans through Nama for the downgrade.
The agency said S&P’s analysis was flawed – it had failed to assign any value to assets, such as loans backing valuable properties in London, purchased by Nama as well as the Government’s investments in AIB and Bank of Ireland.
Chief executive of the NTMA John Corrigan said that S&P’s way of calculating government debt did not match the approach of the International Monetary Fund or the European Union’s statistics agency. In SP’s defence, it is consistent – its analysts have used the same method to determine the debt and ratings of Spain and Cyprus. “If you are in Germany, who are you going to believe?” asked one banker rhetorically, pointing to the futility of the NTMA’s defence.
The rate investors demand to hold Irish 10-year bonds over the equivalent German bond rose to a record level before falling slightly.
The trouble is not with S&P but in the uncertainty about the final cost of Anglo, what the Government plans to do with the bank, how big a stake the Government will have to take in AIB and whether the banks can stand alone without the guarantee.
The Government’s problem is that it is relying on the European Commission, Nama and the markets for resolution of these issues.
Meanwhile, the capital bill at Anglo is heading towards €25 billion with no certainty it won’t rise further once Nama assesses the quality of the remaining €20 billion in loans it will purchase from the bank.
All this comes at a difficult time for the banks as they seek to refinance more than €20 billion in debt before the end of the blanket two-year guarantee next month.
