Irish rating cut 'incomprehensible'
The European Commission has criticised the "incomprehensible" decision by ratings agency Moody's to downgrade Irish debt to "junk" status.
Moody's announced the decision last night hours after Minister for Finance Michael Noonan said that measures to aid Greece proposed by euro zone finance ministers would benefit Ireland.
The agency said the measures being contemplated for Greece had increased the chance that Ireland might default on some of its debts if it has to seek another bailout from Europe.
"Yesterday's decisison by Moody's to downgrade Ireland's credit rating is in the president's view incomprehensible, and in the commission's view of course," the official spokeswoman for European Commission chief Jose Manuel Barroso said.
She told reporters in Brussels this morning the timing of the announcement, with the second quarterly review mission preparing to announce its findings, was "to say the least, questionable".
"The Irish Governnment has shown determination and decisiveness in its implementation of the economic adjustment programme and Ireland's banks are being recapitalised and its financial system more broadly is being repaired, which is of course an essential step to get the real economy back on its feet," she said.
"The exports are growing strongly and the country is regaining competiveness. All of this is set to underpin a return to growth this year which will beging to bring down unemployment in a sustainable manner."
The resulting downgrade saw Irish bonds slump, with yields reaching euro-era highs. Many lenders will only hold bonds considered to be investment grade by privately-owned rating agencies such as Moody’s.
The yield on the two-year bond climbed as high as 18.679 per cent today, and the benchmark 10-year bond yield rose to 13.776 per cent, before falling back slightly.
Italian and Spanish borrowing costs hit their highest level for 14 years yesterday as euro zone leaders made plans for an emergency summit on Friday to resolve the ongoing Greek crisis, which is seen as the weakest link in the euro chain.
The proposed meeting follows the talks on Monday at which a number of proposals were discussed, most significantly the possibility that Greece would be allowed default on some of its debt. One possibility is a German debt-swap plan in which investors would be urged to exchange Greek bonds for debt whose maturity is seven years longer.
Mr Noonan said yesterday that the reforms proposed on Monday would reduce the cost of Ireland’s bailout, provide scope to cut the State’s burden and ease its return to private markets.
But, citing the fresh developments in the Greek situation, Moody’s said in a statement last night there was an increasing possibility that the involvement of private investors (in effect a default) would be required as a precondition for any new aid for Ireland.
It also noted that “Ireland has shown a strong commitment to fiscal consolidation and has, to date, delivered on its programme objectives, the rating agency nevertheless notes that implementation risks remain significant, particularly in light of the continued weakness in the Irish economy”.
Minister for Transport Leo Varadkar said this morning Moody’s move is inconsistent with the other rating agencies. In any case, “it doesn’t really matter all that much” as Ireland is not active in the bond markets, he said.
Mr Varadkar said the events in Italy and Spain over the weekend may aid the Irish cause as they will help generate a European-wide solution to the debt crisis. “We have to get the economy working on our own but we are going to need a European solution to the debt crisis.”
Speaking on RTÉ's Morning Ireland, Minister for Enterprise Richard Bruton said the downgrade would make recovery more difficult, but said Ireland had been caught up in the agency's view of the European solutions to the debt crisis.
"I think it's frustrating and it makes our job more difficult," he said. "But I think the important thing to point out is that it doesn't reflect in any way a failure on the part of Government to meet its obligations or any downgrade in the Irish economy. What it reflects is uncertainty that has emerged as a result of different options that are being considered in Europe."
While Ireland still carries investment-grade ratings with rival agencies Standard Poor’s and Fitch, the downgrade creates big new obstacle for the Government’s plan to exit the EU-IMF bailout programme and start borrowing from debt markets again next year. Only investors with a very large appetite for risk buy junk-rated bonds given the higher implied risk that the issuer may default, or fail to pay back the debt.
A spokesman for the Department of Finance said: “This is a disappointing development and it is completely at odds with the recent views of other rating agencies.”
The spokesman said it was “difficult to see” how the downgrade reflects moves to enhance the fund’s flexibility expressed by euro zone finance ministers on Monday night.
Sinn Féin finance spokesman Pearse Doherty said the downgrade was a wake-up call to the Government and to Ireland's European partners. “The Government’s failure to acknowledge that Ireland’s debt levels are unsustainable and its inaction in reducing those levels have placed us in this position," he said. “This Government is sleepwalking Ireland into a second bailout."
Additional reporting: Bloomberg
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