Irish credit rating cut to level of Libya and SA

Fri, Dec 10, 2010, 00:00

IRELAND’S CREDIT rating was cut yesterday to the same level as Libya and South Africa, and three steps above “junk” status which would force investors to dump Irish bonds. The downgrade came amid concerns about the increased cost of saving the banks.

Rating agency Fitch downgraded Ireland for the second time in two months, citing the higher cost of propping up the banks, weaker economic prospects due to the deepening banking crisis and the loss of access to affordable funding in the financial markets.

The rating was cut by Fitch to BBB+ from A+, marking the first time Ireland has suffered a three-notch downgrade since losing its top AAA-rating in January 2009.

Ireland has suffered 10 credit downgrades by the three main rating agencies over the past two years. Fitch has been responsible for four downgrades.

This is the first time Ireland has slipped below an A rating.

Rival ratings agencies, Moody’s and Standard Poor’s, still have Ireland on A-level ratings but both have said that the State’s sovereign rating could be downgraded.

Ireland still has a better credit standing than Greece, the only other country in the euro zone to receive an external bailout.

Fitch applied the BBB- rating, which is one notch above junk status, to Greece earlier this year.

Ireland’s downgrade reflected the “seriousness of the situation”, said Fitch analyst Chris Pryce, but he didn’t expect Ireland to default.

The country retained an investment grade rating, he said.

“That doesn’t mean we expect the country to default. There is obviously a chance, but that is not our main expectation,” he told RTÉ.

The lower rating also reflected the contingent liabilities facing the State from the bank guarantee.

The economic outlook, which was critical for fixing the public finances, meeting debt repayments and determining further bank losses, was “highly uncertain”.

Ireland’s rating was “no longer consistent with a high investment grade rating”, the agency said.

The €85 billion EU-IMF aid package and the Government’s commitment to fix the public finances “underpinned” Ireland as an investment grade country.

Mr Pryce said the €35 billion bailout for the banks agreed under the EU-IMF deal “seems to be sufficient, though one can never tell in advance,” he said.

This latest bailout should absorb expected losses on mortgages, he said.

Dermot O’Leary, chief economist at Goodbody Stockbrokers, said the downgrade would create “a spiral effect”, leading to further downgrades on the banks, deposit withdrawals and rising funding costs for the State and the banks.

Fitch placed a stable outlook on the State.

“The rebalancing of the Irish economy is well under way, demonstrated by the forecast shift of the current account into surplus next year and recent strong performance of manufacturing and exports,” the agency’s report said.

The euro fell against the dollar as the rating cut and growing political opposition to the EU-IMF plan raised concerns that the European debt crisis may spread further.