S&P lowers Ireland's rating


Ratings agency Standard & Poor's has lowered its sovereign credit ratings on the Republic of Ireland by one notch, but said it was changing its outlook on the country to "stable".

Ireland's rating now stands at BBB+ from A-, putting the country on the same level as Thailand and the Bahamas. The agency downgraded its rating by one notch in February, lowering its long-term ratings to A- from A and its short-term ratings to A-2 from A-1.

S&P said the downgrade was reflective of the agency's view on European Council meeting's concluding statement following its March meeting.

The agency cited the possibility that sovereign debt restructuring could be a pre-condition to borrowing from the European Stability Mechanism (ESM), and that senior unsecured government debt would be subordinated to ESM loans was detrimental to commercial creditors of the sovereign ESM borrowers.

However, there was positive news, with the removal of Ireland's ratings from CreditWatch, where they were placed in November 23rd 2010.

"The outlook is now stable, reflecting our opinion that the assumptions underlying the stress test conducted by the Central Bank of Ireland - in conjunction with the IMF, European Central Bank (ECB), and European Commission - are robust and that the expected €18-€19 billion net cost to the Irish state of additional recapitalisation, plus the contingency buffer for the banking system, is within our range of expectations, albeit at the upper end," Standard & Poor's credit analyst Frank Gill said.

The agency also said it believed the sharp decline in the economy was at an end and the economy would gradually recover.

"We believe that the Irish economy has stronger growth prospects than the Portuguese and Greek economies considering its openness, its flexibility, and its competitiveness," Mr Gill said. "We anticipate that Ireland's current account will post a full-year surplus of more than 2 per cent of gross domestic product (GDP) during 2011, for the first time since 2003, while net exports will continue to be the major contributor to headline GDP performance."

ING said S&P's move was "excellent news" for bondholders, because the bank had expected a larger cut.

"The stable outlook is a very good thing for a credit that has been under intense pressure," Padhraic Garvey, head of developed-market debt in Amsterdam, said. "It's good for holders of Irish paper."

Fitch said it was placing Ireland's long-term foreign and local-currency ratings, currently on BBB+, on rating watch negative, with a possible downgrade in the near future.

Separately, ratings agency DBRS downgraded Ireland's long-term local currency and foreign currency ratings, dropping them from A (high) to "A", and maintained the negative trend on the ratings.

The agency blamed higher bank recapitalisation costs that would lead to a rise in the fiscal deficit and public debt ratios for the move. DBRS also said it had ongoing concerns over the stability of the banking system and the strength of the recovery.

However, the A category rating was supported by the political commitment to fiscal consolidation and the economy's long term growth prospects.

In December, Moody's cut Ireland's rating by five notches to Baa1, three grades above junk, with a negative outlook, also citing uncertainty about the cost of the bank bailout. In the same month, Fitch cut its rating by three notches to BBB+ with a stable outlook.

Portugal and Greece were downgraded on March 29th by S&P.

The cost of insuring against losses on European banks' senior debt fell to the lowest in more than five months this afternoon.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers fell 7 basis points to 136 as of 2pm in London, the lowest since November 19th, according to JPMorgan Chase and Co.

Contracts insuring Portuguese and Spanish government bonds also fell, while swaps on Irish debt stayed lower after the nation's rating was cut.

"There are to be no haircuts on unguaranteed, senior- unsecured debt of Irish banks for now, which in the short term we see as very bullish," said Ivan Zubo, an analyst at BNP Paribas SA in London. The commitment to protect senior bondholders will also help "other senior peripheral bank debt, including Portugal and Spain," he said.

Credit-default swaps protecting Irish sovereign debt declined 14 basis points to 629, according to CMA.

Additional reporting: Bloomberg