Irish debt rating downgraded

Ireland’s credit rating from Standard & Poor’s has been downgraded for a second time in three months because of the sharply rirsing cost of supporting Irish banks.

The agency reduced its rating for the State to 'AA' from 'AA+' with a “negative” outlook.

“We believe that the fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009,” Standard & Poor’s said in a statement this morning.

“Consequently, that the net general Government debt burden will also be significantly higher over the medium term.

Standard & Poor’s analyst David Beers said later today a further downgrade of Ireland’s credit rating was “not inevitable.” Mr Beers was speaking during a conference call this afternoon.

Minister for Finance Brian Lenihan issued a statement insisting his policies were putting the economy on the right track.

“It is important that we communicate a balanced perspective about Ireland and its economic, budgetary and financial situation and prospects,” Mr Lenihan said.

Last week the Government said it would inject €4 billion into the nationalised Anglo Irish Bank, on top of the €7 billion already injected into AIB and Bank of Ireland. Anglo Irish is likely to need a further €3.5 billion if the quality of its underperforming loans continues to deteriorate.

The difference in yield between Irish and benchmark German 10-year government bonds widened after the move by four basis points to 203 basis points by 11.34am in London, the widest since May 1st. The spread reached a ten-year high of 284 basis points on March 19th compared with an average of 22 basis points the previous decade.

“There is a shock value in the move today, but there's no more juice left to continue selling Ireland,” said Orlando Green, a fixed-income strategist in London at Calyon, the investment-banking arm of Credit Agricole SA.

“The market has been trading as if the rating were 'A' anyway.”

Shares in Bank of Ireland and AIB, which had risen to €1.98 and €2.02 respectively earlier this morning but had been falling on profit-taking before the announcement, were lower after the statement

Bank of Ireland was down over 9 per cent at €1.85 while AIB was almost 11 per cent lower at €1.87 at 12.30pm.

Analysts at the ratings agency said its revised opinion followed the announcement by Anglo of record losses for the six months to the end of March which were at “the upper end of Standard & Poor’s expectations” coupled with the planned scope and challenges facing the National Assets Management Agency.

It said NAMA's ability to minimize the cost to the Government of its financial operations “will depend on the prices it pays for the assets and their future performance”.

Standard & Poor’s said it views as uncertain Nama’s ability to meet its financial objectives “because of the risk that cash flows from its assets could fall below its funding costs if their underlying performance worsens compared with NAMA's expectations at the time of purchase”.

Fine Gael’s finance spokesman Richard Bruton said the downgrade was more evidence that Fianna Fáil was “unable to save the economy”.

“This downgrading confirms Fine Gael’s fears that the Government’s approach to the revival of the banking sector will place a massive burden on taxpayers, and the long-term health of our public finances.”

He said the Government should now reconsider its proposals for a National Asset Management Agency “before the taxpayer is irretrievably committed to this position”.

“The timing of this is bad for the Government," Alan McQuaid, chief economist with Bloxham Stockbrokers said. “You'd have to assume that the Opposition will use this as another thing to hit them with.”

“The political situation is clearly the key risk in Ireland," said Rossa White, chief economist with Davy's Stockbrokers.

Ireland is unlikely to default on its debt obligations or turn to the International Monetary Fund for help even after its credit rating was lowered for a second time this year, according to Royal Bank of Scotland Group.

“Ireland has many, many problems and we continue to view it as the weakest fiscal risk in the European Monetary Union, but investors should not leap to the view that this is an Iceland in disguise,” said Harvinder Sian, a senior bond strategist at RBS in London. “Ireland has a policy response in place and it also has the European Central Bank facilities to turn to.”

Additional reporting Bloomberg/Reuters