Rating agency warns Ireland facing further downgrade

IRELAND FACES a further downgrade on its debt as Moodys warned yesterday that it is considering cutting Ireland’s rating, citing “increased uncertainty” in relation to the banking bailout, rising borrowing costs and the subdued state of the Irish economy.

The ratings agency said Ireland’s four-year programme to get its finances back on track would be “challenging” given the economy’s growth prospects and escalated borrowing costs.

As Ireland’s key bond yields remained elevated yesterday, it emerged that Minister for Finance Brian Lenihan is to attend the annual meeting of the International Monetary Fund (IMF) in Washington on Friday. From there, he will travel to New York on Sunday to hold meetings with investors.

The IMF meeting comes amid growing tensions over countries use of their currency to gain economic advantage and doubts for the prospects of effective new rules for banking.

Moody’s chief Ireland analyst Dietmar Hornung said Ireland did not need “outside help” from the IMF or the European Union.

“I don’t think that’s an issue, if you look at the cash balance of the National Treasury Management Agency, which is funded through the first half of next year. The liquidity situation is good. There are no short-term liquidity concerns, so outside help is not needed.”

But Moody’s added that Ireland’s “ability to preserve government financial strength” was uncertain after bank recapitalisation measures exceeding €34 billion were confirmed last week, with a possible burden of €50 billion flagged by Mr Lenihan.

Recent negative second-quarter economic growth data meant the outlook for a recovery in the domestic economy was “clouded”, according to Moody’s, while borrowing costs have “increased considerably” since its last rating decision in July, it noted, pushing up Ireland’s debt servicing bill.

“Taking these three factors into account, Ireland is on a trajectory toward lower debt affordability over the next three to five years,” said Mr Hornung.

Moody’s gives Ireland’s sovereign debt an “Aa2” rating. While any cut would “most likely” be by one notch to Aa3, Mr Hornung said the rating could be cut directly to single A if the agency judged that a stabilisation in key debt ratios “in the next three to five years appears unlikely”.

A one-notch cut would bring its rating on the country in line with the credit ratings given to Ireland by the other two agencies to influence investor sentiment, Standard Poor’s and Fitch.

Moody’s has also placed the Aa2 credit rating of the National Asset Management Agency on review, as its debt is fully guaranteed by the government.

After closing below 6.3 per cent on Monday, the yields on Irish bonds inched up to 6.39 per cent yesterday, while the spread between Irish sovereign debt and the benchmark German bund widened to 4.1 percentage points at the close of trading.

“Ireland is on review by the market 24/7,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London.

Meanwhile, Fitch Ratings has downgraded the mortgage covered bonds issued by Anglo Irish Bank from “AA+” to “A”.

The bank’s two mortgage covered bond programmes, one in the UK and the other in Ireland, retain their “negative” outlook from Fitch, which noted that the refinancing of “even good quality Irish commercial real estate mortgage loans would be challenging”.

Details of the four-year fiscal consolidation plan will be published early next month, the Department of Finance has also confirmed. Fine Gael’s public expenditure spokesman Brian Hayes yesterday criticised Brian Cowen for not declaring his target for cutbacks next year. – (Additional reporting: Bloomberg)