Ireland Long-Term Sovereign Rating Lowered by Standard & Poor's

By Christopher Anstey - Nov 24, 2010 9:34 AM GMT+0800


Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the nation’s bailout of its banking system is set to escalate the government’s borrowing needs.

“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement. Putting the rating on “CreditWatch with negative implications” reflects risk of a further downgrade if talks on a European Union-led rescue fail to stanch capital flight, it said.

The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record. Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.

S&P cut Ireland’s long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today’s statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece. It’s now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea, according to data compiled by Bloomberg.

‘Lots of Risks’

“There are lots of risks in the European markets,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The flight to quality is supporting Treasuries.”

U.S. Treasuries have advanced the past three days, with 10- year notes slipping today in Asian trading. Yields on 10-year notes were at 2.787 percent as of 9:34 a.m. in Tokyo. The euro was up 0.3 percent at $1.34 after two days of losses.

Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.

EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros ($114 billion), according to two officials familiar with the talks.

Financing Breakdown

The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.

“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today. Ireland’s gross domestic product has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”

Ireland’s Finance Minister Brian Lenihan will today lay out a four-year deficit-cutting program, a proposal endangered by the ruling party’s coalition partner announcing it will exit the government next month. Opposition parties are calling for Prime Minister Brian Cowen to agree to an immediate election.

Risk Premium

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.

Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.

As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.

Allied Irish Banks Plc may be 99.9 percent state controlled after the government uses external aid to boost its capital levels, and Bank of Ireland Plc may be majority state controlled after the injection, broadcaster RTE said yesterday, without citing anyone.

Irish lenders core tier 1 capital level may be raised to 12 percent from 8 percent, according to the broadcaster.

The government may seek to share losses with Allied Irish’s subordinated bondholders, though senior debt would be honored, RTE also said.