Junk status Q&A

 

CONOR POPEanswers readers questions

What is this junk status we have just been landed with?

These credit ratings are like a set of odds set by a number of international agencies that look at what has happened, what is happening and what is likely to happen to a country’s debt, or bonds.

The agencies then decide if a country is a good or bad investment risk. Moody’s says the measures being contemplated for Greece have increased the chance that Ireland might default on some of its debts if it has to seek another bailout from Europe.

The agency reckons Ireland has made progress in tackling its debts, but says “risks remain significant”. It is also of the opinion that there is an increasing possibility that private-sector holders of Irish bonds will be asked to take part in talks if a second bailout happens.

Who died and made Moody’s God?

The markets. For a very long time they have placed a huge amount of faith in what the main agencies say.

When it comes to dispensing advice and issuing guidance ratings, agencies are the first port of call and many investment decisions are automatically triggered by their announcements.

So is that it then, are we junk?

No, the Moody’s assessment is subjective and not shared by everyone – the Government, the European Commission and independent financial analysts have all railed against the rating.

A Department of Finance spokesman said it was “a disappointing development and it is completely at odds with the recent views of other rating agencies”.

Irish stockbrokers Bloxham said the downgrade was “cynical and manipulative coming just two days before the EU-IMF in their latest quarterly review are expected to give Ireland the thumbs-up in meeting all its bailout”.

So what has Moody’s got against us?

Nothing. Many of the rating agencies were slow to move on re-grading countries, such as Ireland, in the early stages of the financial crisis and subsequently got a lot of flack from the markets.

With egg on their faces, they have since adopted a much more aggressive stance when it comes to changing a country’s status.

This may explain the reason Moody’s acted earlier this week.

Do they ever get it wrong?

Do they ever! Remember the subprime market? All the major agencies, including Moody’s, rated subprime bonds as Triple A – the highest and most secure investment rating. This was despite the fact that they were the ultimate junk bond and proved to be more high-risk than crossing the Grand Canyon on a tight-rope.

The agencies completely misunderstood the nature of the subprime market, as did many others.

That single fact was one of the key elements of the US financial crisis.

What difference does it make?

Ireland still carries investment- grade ratings with the other agencies Standard and Poor’s and Fitch, but the downgrade creates obstacles for the Government’s plan to exit the EU-IMF bailout programme and start borrowing from debt markets again next year or in 2013.

Only investors with a 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.

It will also make it harder for Irish banks to raise funds.

But considering that it has been next to impossible for them to do that for the last 12 months, consumers are unlikely to know any different.