Ireland's debt rating unchanged


Ratings agency Standard & Poor's affirmed Ireland's sovereign debt rating, but said it was at risk if Ireland lost access to EU funding following the upcoming referendum on the fiscal treaty.

Ratings agency Standard & Poor's affirmed Ireland's sovereign debt rating, but said it was at risk if the country lost access to EU funding following the upcoming referendum on the fiscal treaty.

The warning came less than a day after it downgraded Spain and sent shockwaves through the markets.

S&P currently rates Ireland at BBB/A2, but said there was a one in three chance that it could lower the rating next year, reflecting the negative rating.

"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.

S&P said the rating could come under pressure in the short-term if Ireland lost access to funding from the European Stability Mechanism (ESM) following a referendum on May 31st.

"We believe that if the Government cannot access the ESM, this could exacerbate Ireland's funding difficulties when its current program expires at the end of 2013. As a result, Ireland could need additional official financial support.

“We consider it unlikely that the IMF or other potential providers of official funding would agree to fully finance a successor program without significant co-financing from Ireland's euro zone partners," it said.

S&P yesterday lowered Spain’s long-term credit rating by two notches, saying the country’s budget problems are likely to get worse because of the weak economy.

The ratings agency reduced Spain’s long-term sovereign credit rating to BBB+ from A and also lowered the country’s short-term rating and assigned a negative outlook, which suggests the possibility of another downgrade in the near future. 

Spain's credit rating is still investment grade, three notches above junk status. Nonetheless, the lower rating could increase the nation's borrowing costs because investors will likely demand higher interest rates to compensate for the greater risk implied by the downgrade.

But it is nowhere near Greece, which was downgraded to default by the three major rating agencies after its private creditors were forced to take the biggest debt writedown in history. 

The agencies - S&P, Moody’s and Fitch - are expected to raise Greece's rating after it this week completed a huge bond exchange designed to more than halve its privately held debt.

S&P’s downgrade of Spain, announced after the close of markets in the US, was not a total surprise. Moody’s cut Spain’s rating two notches in February due to the country’s difficult fiscal outlook.

S&P cited the risk that Spain’s government debt will expand as the contracting economy exacerbates the nation’s budget woes. The Spanish central bank confirmed this week that Spain is in recession for the second time in three years. The jobless rate of nearly 23 per cent is expected to rise.

The agency also noted the “increasing likelihood” that the Spanish government will need to provide further help for the banking sector. 

To go along with the credit downgrade, S&P lowered its forecast for Spain’s economic outlook. The agency said it expects the economy to contract by 1.5 per cent this year and 0.5 per cent in 2013. Its previous outlook had growth of 0.3 per cent in 2012 and 1 per cent in 2013. 

Spain's new conservative government has forecast that the economy will contract 1.7 per cent this year.

The drags on economic growth include declining disposable incomes, reduction in private borrowing, implementation of the government’s fiscal plan, and uncertain demand in key trading partners, S&P said.

The agency said Spain’s economy was “rebalancing” and the government’s moves should help. 

The government of prime minister Mariano Rajoy has pushed through deficit-reduction steps including labour market and financial sector measures.