Moody's puts Ireland on watch for downgrade

Ratings agency Moody’s has threatened to downgrade the State’s debt rating if the Government’s finances deteriorate further.

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

Moody’s 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 liabilities arising from the Irish banking system.

Moody’s is also concerned by 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”.

As a result of these concerns the agency has lowered its outlook for the State’s debt ratings from stable to negative.

Dietmar Hornung, Moody’s Sovereign Analyst for Ireland, said the decision was giving 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”.

He said while the Government’s attempts to secure €2 billion in spending cuts this year was important information for the market “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”, according to Mr Hornung.

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

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

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

The report adds that it is “too early to conclude that most of the factors that contributed to its economic vitality have been structurally eroded".

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.

Standard & Poor’s said the downward revision reflects “mounting fiscal pressures” and “deterioration of key economic sectors”.

However, on a more positive note, a third agency Fitch affirmed Ireland’s “AAA” credit rating last week and declared its long-term outlook stable.

“Economic fundamentals provide Ireland with the ability to withstand this stress and maintain its AAA status,” Fitch said.