Moody’s Cuts Ireland Rating Two Levels, Outlook Negative

By Finbarr Flynn - Apr 15, 2011 1:46 PM GMT+0700

• inShare12
• More
• Print
• Email

A pedestrian passes a branch of the Allied Irish Bankin Dublin. Photographer: Aidan Crawley/Bloomberg

Ireland’s credit rating was cut two levels by Moody’s Investors Service to the lowest investment grade rating as the government struggles to plug the budget deficit and restore economic growth.

Moody’s lowered the country’s rating to Baa3 from Baa1, leaving the country’s outlook on negative, according to an e- mailed statement today. That’s the same rating as Iceland, Tunisia, Romania and Brazil. Standard & Poor’s on April 1 cut Ireland’s rating one level to BBB+ with a stable outlook.

Europe’s worst banking crisis may end up costing Irish taxpayers as much as 100 billion euros ($145 billion) as the country draws down funds from last year’s bailout. Ireland is trying to convince investors at home and abroad it has finally plugged the hole in its lenders after four failed attempts following the collapse of the country’s property boom in 2007.

Ireland is now in the “most uncomfortable of places to be on the ratings scale, one false step from junk,” Gary Jenkins, head of credit strategy at Evolution Securities Ltd. in London, said in an e-mailed note.

‘Weak’ Prospects

The extra yield investors demand to hold Irish rather than German 10-year bonds has narrowed to 592 basis points from 687 basis points since central bank Governor Patrick Honohan detailed the capital needs of the banks on March 31.

Ireland’s central bank yesterday cut its economic growth forecast for this year and next, saying consumer demand remains “subdued.” Gross domestic product will rise 0.9 percent this year instead of 1 percent forecast in January, the bank said, forecasting 2.2 percent growth in 2012.

“The country’s weak economic growth prospects are driven by the fiscal consolidation process, the ongoing contraction in private-sector credit, and a more adverse interest rate environment,” Moody’s said. “The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected, or if fiscal adjustment were to fall short of the government’s planned consolidation path.”

S&P cut Portugal for the second time in a week last month to the lowest investment-grade rating of BBB-. Greece’s rating was lowered two grades to BB-, three levels below investment grade. New rules on European Union bailout loans, which take effect in 2013, mean sovereign-debt restructuring is a “potential precondition to borrowing” from the future rescue fund, the rating company said.

Ireland’s government has injected about 46 billion euros into banks and taken majority stakes in four of them. Honohan said on March 31 it is realistic to expect Bank of Ireland Plc and Irish Life & Permanent Plc, the two lenders not already owned by the government, to fall under state control.

Finance Minister Michael Noonan said last month Ireland can sustain mounting debt levels if it fixes its lenders and maintains economic growth.

To contact the reporter on this story: Finbarr Flynn at fflynn3@bloomberg.net

To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net