Standard & Poor's revises down outlook for Irish economy

Standard & Poor’s has revised down its outlook on the Republic of Ireland to negative from stable and warned that it may cut Ireland's triple ‘AAA’ sovereign debt rating due to worsening public finances and a deepening recession.

The ratings agency said its downward revision "reflects our opinion of the rising economic policy challenges stemming from the contraction of the key housing, construction, and financial sectors, which had driven strong economic growth and fiscal consolidation, creating the possibility of a ratings cut.

The move is likely to result in an increase in the cost of borrowing for the Government. After the S&P statement, the yield premium offered by 10-year Irish Government debt over benchmark euro zone paper widened by five basis points to a new high of 64 bps before coming back.

The Government yesterday raised €6 billion to cover the State's expenditure but at higher rate than in many other countries.

The State's money manager, the National Treasury Management Agency (NTMA) sold a five-year Government bond at a cost of 4.07 per cent. The rate is 25 basis points, or 0.25 per cent, above the cost that the State is paying for its existing five-year bonds.

The Government paid 1.72 percentage points more than the cost of Germany's existing five-year bonds, indicating that Irish sovereign debt is considered by investors to be a higher risk.

Standard & Poor's credit analyst Trevor Cullinan said today the collapse in property-related taxes from 15 per cent of total tax revenues in 2006 to 8 per cent in the first eight months of 2008, was the single most important factor in the deterioration in the general Government balance.

Earlier today the CSO's live register showed the number of people claiming unemployment benefits rose last month to a 15-year high of 293,5000. That figure is expected to grow rapidly and the Government now predicts unemployment could hit 9.3 per cent this year as economic output declines 4 per cent.

Ireland's largest exporter Dell announced yesterday it was shifting its European manufacturing base to Poland from Limerick with the loss of 1,900 jobs.

Mr Cullinan said Government debt had increased substantially between 2007 and 2008 as a result of the widening deficit.

"The negative outlook reflects our view of the likelihood of a downgrade if ongoing fiscal measures to recapitalize the banks and boost the economy fail to improve competitiveness, diversity, and growth prospects, thereby leaving a more difficult-to-manage debt burden," he said.

"Conversely, the negative outlook could revert to stable if the government's strategy is successful and allows public finances to return to the stronger position of recent years," he added.

He said the Government decision to extend a deposit guarantee to seven domestic credit institutions had increased general Government guaranteed debt to an estimated 228 per cent of GDP in 2009.

"Banking system exposure to the property and construction sector of about one-third of total loans (excluding interbank lending) suggests a high risk of asset deterioration at these institutions," Mr Cullinan added.

Additional reporting Reuters