WHEN IT rains, it pours. As if things were not bad enough in the market for Irish Government bonds, one of the world’s three major credit rating agencies decided to change its assessment of the State’s creditworthiness. Unsurprisingly, it was not a change for the better. The mounting costs of the banking rescue, it believes, mean that Ireland has moved one step further from the solid ground of solvency.
By Standard Poor’s (S&P’s) calculation, the State is now rated three notches below the top, triple-A ranking it enjoyed as recently as March 2009. This is not a catastrophe – six of 16 euro area countries are more negatively assessed by S&P – but it has consequences.
Yesterday, yields on Irish government debt rose sharply. The benchmark bond of 10 years maturity rose to close the day at almost 5.6 per cent. This is the highest since the EU agreed to put together a massive bail out fund in early May at time when the entire euro project was being shaken to its foundations. Even the existence of a ready-to-go rescue package for the fiscally weak euro area members, such as Ireland, and the equally unprecedented interventions of the European Central Bank have not stopped the sometimes gradual, sometimes steep upward trend in yields.
Today’s efforts by the National Treasury Management Agency (NTMA) to raise more money will not be aided by the downgrade. Taxpayers will in all probability pay even more than they did when the agency last raised similar short-term debt. This amounts to one more straw on the camel’s back of the State, which is straining under the costs of bailing out the banks and, to an even greater extent, very large recurring budget deficits. The timing of S&P’s decision will add to anger across Europe. It spooked already jittery bond investors. The contagion effect was the main reason yields of two of the other weaker countries – Greece and Portugal – also widened sharply.
The NTMA’s response to the downgrade was unusual. The agency’s chief executive took to the airwaves. John Corrigan begged to differ with aspects of S&P’s analysis. On RTÉ radio yesterday morning, he criticised the decision to value at nothing the State’s shareholdings in the two large banks. On CNBC, a TV channel which is piped into every financial trading floor in the world, he protested that S&P’s measurement of Ireland’s public debt was not consistent with any international standard.
Mr Corrigan’s protestations echo frustrations voiced earlier in the year across the Continent. The timing of rating agency’s downgrade decisions added momentum to the rapidity with which the sovereign debt crisis took hold. Even prior to that, the agencies were already facing much greater scrutiny of their methods owing to the manner in which they mis-rated many of the toxic assets at the centre of the international financial crisis. In the future, they can expect to have to account not only for the way they arrive at their ratings decisions, but at the timing of their announcements. This is no bad thing. The crisis showed that more and better regulation is needed in many corners of the financial system. It is needed for rating agencies too.