Standard & Poors downgrades State's credit rating

International ratings agency, Standard &Poors (S&P) has downgraded the Republic’s credit rating, a move that could increase the interest that the State will have to pay on future borrowings.

S&P’s move came as Irish 10-year bonds fell and German bunds surged, widening the so-called yield spread to a record and surpassing the level it reached before the European Union and IMF announced a rescue plan in May.

S&P cut the Republic’s rating from AA to AA minus, which means it believes that there is an increased risk that the State will not be able to meet its liabilities.

However, AA minus means that the borrower has “very strong capacity to meet financial commitments”, according to the agency’s rating system.

S&P based its calculations on a €50 billion estimate for bank recapitalisation, which the National Treasury Mangement Agency (NTMA), described as extreme, and Nama’s €40 billion liabilities.

Commenting on the news, the NTMA, which is responsible for managing the State’s debts, said that is has already met 99 per cent of this year’s Exchequer borrowing requirements. It argued that SP’s approach to analysing the Republic’s liabilities was flawed.

Whereas the yield on German 10-year bonds fell 11 points to just 2.18 per cent yesterday, that on the Irish equivalent rose two points to 5.35 per cent. The difference between the two, known as the spread, stood at 317 basis points, a record since the single currency was adopted in 1999. The spread was up from 304 basis points on Monday.

Yields on Irish and German government bonds were almost identical from the launch of the euro until early 2008. The decoupling since then has been driven by rising yields on Irish debt, which is viewed as being at growing risk of default, and falling yields on German debt. The euro zone’s largest economy appears particularly sound relative to peripheral countries, such as Ireland.

“The Irish story is under scrutiny and there are sizeable issues with regards to banking recapitalisation,” said Padhraic Garvey, head of developed-market debt strategy at ING in Amsterdam.

“However, much of the spread widening is not an Irish credit issue; it’s down to a rally like we’ve rarely seen before in the bund.”

The German 10-year bond hit an all-time low of 2.13 per cent yesterday as investors sought the safety of a large solvent sovereign. Germany’s relatively sound public finances meas that the risk of it defaulting on its debt is minuscule.

The Irish-German spread is the first to widen to a record among the peripheral euro zone states since the €750 billion bailout package was announced on May 8th. Greece was the only other euro state whose government bond yields rose yesterday.