Ireland had its credit rating cut one level at Moody’s Investors Service, which cited a “significant loss of financial strength” and the cost of bank bailouts.
The company lowered Ireland to Aa2 from Aa1 and moved the country to a “stable” from a “negative” outlook, it said today in a statement. Ireland lost its top rating at Moody’s in April 2009. Irish bonds fell after the downgrade.
The euro has fallen 10 per cent versus the dollar this year on concern that widening budget deficits in countries including Ireland, Spain and Greece could lead to a default. While Irish Finance Minister Brian Lenihan said last week that the country’s fiscal position is “stabilising”, the cost of aiding the banking industry is adding to pressure on the public finances even as the economy emerges from recession.
“It’s a gradual, significant deterioration, but not a sudden, dramatic shift,” Dietmar Hornung, Moody’s lead analyst for Ireland, said in a telephone interview. Overall, “we have a constructive view. We agree Ireland has turned the corner.”
Bond premium
The premium investors charge to hold Irish 10-year debt over the German bund, Europe’s benchmark, widened 8 basis points to 291 basis points today. The yield reached 306 points in May, the widest since the introduction of the euro in 1999.
Bank of Ireland Plc, the country’s biggest bank, fell 2.6 per cent to 67 cents at 9:31 a.m. in Dublin, while Allied Irish Banks Plc dropped 2.8 per cent to 85.5 cents.
“Ireland is one of the countries which are currently under stress, but that are likely going to benefit from a recovery,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Plc in London. “The rating is probably just a catch-up process towards ratings that are more aligned with the underlying fiscal policy fundamentals.”
Ireland’s recession and real-estate slump eroded tax revenue and left it with a budget deficit of 14.3 per cent of gross domestic product last year, the widest in the euro area. The country’s debt ratio may rise to 87 per cent of GDP this year from 66 per cent of GDP in 2009, the government has forecast.
The Dublin-based Economic & Social Research Institute on July 14 forecast that the deficit may widen to 19.8 per cent of GDP this year, in part because of government pledges to inject 13 billion euros ($16.9 billion) into two banks. The government aims to reduce the gap to the European Union limit of 3 per cent of GDP by 2014.
Moody’s said the downgrade reflected Ireland’s “significant loss of financial strength,” weakened growth prospects and “contingent liabilities from the banking system.” In addition to pumping money into banks to build up their capital buffers, Ireland set up a so-called bad bank to cleanse banks of toxic loans.
