S&P warns No vote could hit rating

Sat, Apr 28, 2012, 01:00

IRELAND COULD see its cost of borrowing soar once more if the referendum on the fiscal treaty is defeated, rating agency Standard Poor’s warned yesterday, noting there was a one-in-three chance Ireland would be downgraded again.

The rating agency also warned that the European Central Bank could not solve the region’s debt crisis amid concerns it continues to worsen as Spain’s borrowing costs rose again yesterday.

Ireland’s sovereign debt rating was affirmed yesterday, less than a day after SP downgraded Spain.

“In our view the Irish Government has responded in a proactive and substantive way to the significant deterioration in public finances it experienced during the financial crisis, and we now expect additional fiscal savings of about €12.4 billion (7.8 per cent of GDP) for 2012-2015,” the agency said.

However, the agency warned this rating could come under pressure if Ireland was to lose its access to the European Stability Mechanism following the referendum on May 31st.

Moreover, it kept its negative outlook for Ireland due to the Government’s “still substantial task” of reducing the deficit to less than 3 per cent by 2015, as well as the possibility that Ireland could lose its funding through the ESM as a result of a No vote.

Elsewhere, Moritz Krämer, head of sovereign ratings for Standard and Poor’s, said the ECB could not solve the region’s debt crisis, and Spain continued to attract negative headlines.

Following its two-notch downgrade, Spain’s cost of borrowing soared once more as investors briefly pushed it above 6 per cent. However, analysts were keen to downplay the impact of the downgrade.

“The Spanish downgrade has already been priced in by the markets, and while a clear negative it is unlikely to have a significant impact on Italy and the other peripheral countries on its own,” said Biagio Lapolla, a rate strategist at Royal Bank of Scotland Group in London.

Nonetheless, Italy also faced an increase in its cost of borrowing yesterday. It sold €5.95 billion of 10-year bonds, paying 60 basis points more than it did a month ago. The bonds were sold at a rate of 5.84 per cent, up from 5.24 per cent at the previous auction on March 29th. The sale of €2.42 billion of five-year debt was also more expensive than a month ago, with a yield of 4.86 per cent compared with 4.18 per cent.

Back at home, Irish Banking Resolution Corp continues to repay its outstanding bondholders. It redeemed two unsecured bonds, not covered under the Government’s guarantee, of €30 million and €10 million yesterday, with investors receiving the full 100 cents in the euro on their investment. The bank now has € 4 billion in outstanding bonds left to repay.