State's creditworthiness nears 'junk' status

CREDIT RATINGS:RATINGS AGENCIES gave their verdict on the Central Bank stress tests by pushing Ireland's credit rating closer to "junk status" yesterday. Standard Poor's downgraded the Republic's sovereign credit rating to "BBB+", leaving it just three notches above the "junk" grade.

Fitch, which already put Ireland in the “BBB+” category, placed its outlook for the credit rating on a negative watch. This means the possibility of a downgrade by Fitch in the near future has increased.

Standard Poor’s cited the possibility that sovereign debt restructuring could be a precondition to borrowing from the European Stability Mechanism (ESM). It said senior unsecured government debt would be subordinated to ESM loans, which would prove detrimental to creditors of the sovereign ESM borrowers.

Despite its downgrade, however, the agency was relatively upbeat about the economy. It said the outlook for its rating on Ireland’s sovereign debt was “stable” as a result of the “credibility” of the stress test exercise.

Standard Poor’s credit analyst Frank Gill said the agency felt the assumptions underlying the findings were “robust” and that the net cost to the State of the additional €24 billion recapitalisation was within its range of expectations, “albeit at the upper end”.

The agency said it believed the sharp contraction in Ireland’s nominal gross domestic product and gross national product had reached an end.

“The Irish economy is now set to gradually recover,” it said. “We believe the Irish economy has stronger growth prospects than the Portuguese and Greek economies considering its openness, its flexibility and its competitiveness,” Mr Gill added.

The agency also issued a notice indicating that it was placing on review the creditworthiness of AIB, Bank of Ireland, Irish Life Permanent and Anglo Irish Bank.

It said Ireland’s downgrade could have a negative impact on its assessment of three foreign-owned banks operating here: Barclays, KBC and Ulster Bank.

Meanwhile, Fitch cited “further negative developments” since December as the reason for placing Ireland’s rating on negative watch. GDP figures for the fourth quarter were “unexpectedly weak” it noted, while the latest bank recapitalisation costs meant Ireland’s debt-to-GDP ratio was likely to rise higher than Fitch’s previous projections.

A “BBB+” rating puts Ireland on the same level as Thailand and the Bahamas in terms of creditworthiness.