State borrowing costs rise following credit rating cut

Shares in Ireland's biggest banks closed flat or lower this evening and Government bonds have widened following the decision by Standard & Poors (S&P) to cut the Republic's credit rating.

The yield on 10-year Government bonds rose to 5.58 per cent, about 3.5 percentage points above the German equivalent.

On the Dublin market shares in AIB fell by 2.8 per cent to 77 cent  while shares in Bank of Ireland were flat at 75 cent.

The cost of insuring against default on Irish bank bonds approached the highest in a year.

S&P cut the Republic’s rating from AA to AA minus, which means it believes that there is an increased risk that the State will not be able to meet its liabilities.

The ratings agency based its calculations on a €50 billion estimate for bank recapitalisation, which the National Treasury Management Agency (NTMA) described as extreme, and Nama’s €40 billion liabilities.

Commenting on the news, the NTMA, which is responsible for managing the State’s debts, said that is had met 99 per cent of this year’s Exchequer borrowing requirements. It argued that S&P’s approach to analysing the Republic’s liabilities was flawed.

NTMA chief executive John Corrigan today described the downgrade as disappointing but said he was not surprised.

Mr Corrigan accepted there was still uncertainty about the transfer of loans to the National Asset Management Agency (Nama) but said S&P's estimate as to the cost of repairing the banking system was "at the extreme end of any analyst's comment."

He said S&P's analysis does not allow for underlying assets in either the top banks or in Nama, which he claimed would be realised over the medium term.

"They haven't measured the cost on a net basis (and) that's essentially our argument with them...the key issue is how you measure the net debt and they have made no allowance whatsoever, they attribute no value whatsoever, for the assets which Nama are acquiring," said Mr Corrigan.

"To put this into perspective about 25 per cent of the underlying collateral in Nama relates to property in London. Is Standard & Poors seriously suggesting that such property is worth nothing?"

Mr Corrigan told RTÉ radio this morning the approach adopted by S&P did not accord with any international standard and was so unique the firm had published a technical addendum to their paper explaining how they arrived at their calculations.

Fine Gael said the deterioration in Ireland's credit rating was due in part to uncertainty over the final cost of the bank rescue.

“When the Government nationalised Anglo Irish Bank, almost two years ago, Minister for Finance Lenihan estimated the cost at €4.5 billion. Last week he said the cost would not be around €24 billion. The markets do not believe him. This huge amount of money, together with the recapitalisation costs of the other banks, as well as the overhang of NAMA, have spooked the markets and have caused the S&P downgrade," said party finance spokesman Michael Noonan.

“Minister Lenihan must give certainty to the markets. He must provide a final figure on the cost of the bank rescue. He must show, if he can, that Anglo is still worth rescuing rather than winding it down in an orderly fashion as proposed by Fine Gael," he added.

Labour Party finance spokeswoman Joan Burton said that after the latest downgrade, the Coalition's banking policy was in disarray.

“Confidence is a key component of a recovery strategy and it is very evident today that there is very little confidence either nationally or internationally in the current Government’s capacity to get to grips with the true costs of the Irish banking collapse.”

Separately, Sinn Féin's finance spokesman Arthur Morgan said the credit rating downgrade further undermined the Government's banking policy.

He said the effect of this downgrade would be crippling for the whole economy as the higher cost of borrowing will lead to a further obliteration of public services as more and more funds would be diverted to paying these increasing costs.

“The cost of borrowing will increase once more for the Irish Government as a result of their perverse allegiance to an ailing banking system. Standard & Poor’s have lent their voices to the growing professional opinion that the ultimate costs of bank bailouts will surpass original estimations, doubling to as much as €50 billion," he said.