Fitch downgrades credit rating over banks' recapitalisation

IRELAND’S CREDIT rating has been downgraded to “A+” status by the ratings agency Fitch in response to the greater than expected cost of recapitalising the banks.

In a signal that the investment markets are now beginning to look beyond the lifetime of the current Government, Fitch noted that “broad-based political support would help strengthen the credibility” of Ireland’s bid to reduce its deficit.

The ratings agency’s move put further pressure on government borrowing costs yesterday. The yields on Irish bonds increased to 6.46 per cent by the close of trade, while the spread between Irish sovereign debt and the benchmark German bund rose to 4.24 percentage points.

Fitch’s credit rating for Ireland is now the lowest among the main ratings agencies.

“The downgrade of Ireland reflects the exceptional and greater than expected cost associated with the Government’s recapitalisation of the Irish banks, especially Anglo Irish Bank,” said Chris Pryce, a director in Fitch’s sovereign group, based in London.

“The negative outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort,” he added.

A negative outlook means there is a greater than 50 per cent probability of a further downgrade over the next one to two years.

Mr Pryce said seeking a bailout would be a “last resort” for the Government, as it may be conditional on the country raising its corporation tax rate from 12.5 per cent.

Ireland’s rating could be downgraded further if the economy stagnates or the “implementation of budgetary consolidation weakens”, Fitch said in a statement.

The move comes a day after Moody’s said it may cut Ireland’s rating from “Aa2”, most likely by one notch to “Aa3”. The third major credit ratings agency, Standard Poor’s, gives Ireland an “AA” rating.

However, Fitch’s statement also included some relatively reassuring notes, with the firm’s analysts describing as “plausible” the Government’s latest estimate that it will cost €45 billion to recapitalise the banks and transfer assets to the National Asset Management Agency (Nama).

It added that it was “reasonable” to assume that Nama would now break even over the long term, given the average discount that has been applied to the transferred assets has reached 58 per cent.

Separately yesterday, Moody’s placed €550 million of Bord Gáis debt on review for possible downgrade. The ratings agency said the review was triggered by “increased uncertainty regarding the government’s ability to preserve its financial strength against the backdrop of a clouded economic outlook”. Moody’s said the outcome of the review would be mostly driven by “developments at the sovereign rating level”. As part of the process, the agency will examine the level of State support available to Bord Gáis in light of of the Government’s “reduced financial flexibility”.

Any downgrade will probably be limited to one notch from the current A2/P-1 rating because of Bord Gáis’s “solid standalone credit quality”, Moody’s added