FITCH RATINGS cut Ireland’s AAA ratings by one level to AA-plus, the second-highest, citing a severe economic downturn taking a “heavy toll” on public finances. Fitch also said it holds a negative outlook for Ireland, suggesting more cuts may come.
“The outlook for Ireland’s public finances and fiscal risks is no longer consistent with an ‘AAA’ rating,” Fitch said in a statement.
The news, which came after the markets close followed a day in which the two main banks “bungee jumped” on the stock market yesterday, plunging sharply as investors reacted to the Government’s asset plan, but rallying by the end of the day.
John Corrigan, a director of the National Treasury Management Agency, told a press conference on the new asset management agency that Fitch had cut the sovereign rating. “We had AAA. Today they brought their rating to AA-plus,” he said.
Fitch subsequently confirmed the move in a statement. Ireland’s GDP is expected to decline by 8 per cent in 2009, and Government revenues may fall by 16 per cent, following similar declines in 2008, said Fitch.
“The rating reduction has already been discounted and it’s all in the price of the bonds,”� said Pádhraic Garvey, head of investment-grade debt strategy in Amsterdam at ING Groep NV.
Standard Poor’s lowered Ireland’s rating one step to AA+ on March 30th with a “negative” outlook.
The difference in yield, or spread, between Irish 10-year bonds and equivalent German securities rose nine basis points to 213 basis points yesterday before the announcement as the market digested Tuesday’s supplementary Budget. The spread, which soared to 284 basis points on March 19th, averaged 19 basis points in the past 10 years.
AIB and Bank of Ireland’s stock prices fluctuated wildly on heavy volume, tumbling by more than 30 per cent in the morning session. Brokers attributed this plunge to a number of factors, including the uncertainty created by Tuesday afternoon’s Budget.
Although Minister for Finance Brian Lenihan announced the creation of an asset management company to buy between €80 and €90 million of problem loans from the banks, he left the option open to apply a levy to the banks to recoup any future shortfall if the debts are not recovered.
Investors were further unnerved by the fact that the Minister did not reveal how much the Government will pay the banks for these debts.
This uncertainty, combined with “general negativity towards Ireland” and the downgrading of 12 banks in the country by credit rating agency Moody’s, led to “bungee jumping” in bank share prices, as one broker described it.
AIB finished the day at €1.21, down about 5.5 per cent, while Bank of Ireland was off 7 per cent at just under €0.90.
Although it also had a volatile day’s trading, Irish Life Permanent emerged as the clear winner in the banking sector, closing the day up 9 per cent at €1.80. – (Additional reporting Reuters and Bloomberg)
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