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Europe

Moody's cuts Ireland's debt rating by one notch

Text by News Wires

Latest update : 2010-07-19

Ratings agency Moody's downgraded Ireland's sovereign bond from Aa1 to Aa2 on Monday, saying it would be years before banking and real estate would contribute meaningfully to economic growth.

AFP - A top rating agency downgraded Irish debt on Monday, saying that the once Celtic Tiger is being greatly weakened by radical action to fight debt and rescue banks but may be stabilising.

Moody's agency cut Ireland's debt rating to Aa2 on Monday, blaming high debt levels, weak economic growth prospects and the huge cost of rescuing banks.

"Moody's Investors Service has today downgraded Ireland's government bond ratings to Aa2 from Aa1," the group said in an official statement, but added that it had switched its outlook to stable from negative.

The agency cited three reasons for the downgrade to Ireland's economy, which was the first eurozone member country to plunge into recession in the first half of 2008, and only just emerged in the first quarter of 2010.

"The main drivers for the downgrade are... the government's gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability," it said.

Another key factor was "Ireland's weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit".

In addition, Moody's also blamed the "crystallization of contingent liabilities from the banking system" in the wake of costly state measures to stabilise and rebuild the shattered banking sector.

Ireland has pumped huge sums of money into crisis-hit banks and set up the National Assets Management Agency (NAMA), a state-run "bad bank" that is designed to soak up billions of euros of lenders' toxic assets.

"Overall, the recapitalization measures announced to date could reach almost 25 billion euros -- and Moody's expects that Anglo Irish Bank may need further support," it said.

"In addition, the government created NAMA, a special purpose-vehicle that is acquiring loans from participating banks at a discount in exchange for government-guaranteed securities.

The agency added: "We believe that the uncertainty surrounding final losses would exert additional pressure on the government's financial strength."

Ireland was hammered by the financial crisis after more than a decade of growth which it raised it rapidly to be among the richest nations in Europe in relative terms. Its economy shrank by a severe 7.6 percent in 2009, slashing taxation revenues.

"Today's downgrade is primarily driven by the Irish government's gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability," added Dietmar Hornung, Moody's lead analyst for Ireland.

He added: "The country has suffered a dramatic contraction in GDP since 2008, causing a sharp decline in tax revenue.

"The general government debt-to-GDP ratio rose from 25 percent before the crisis to 64 percent by the end of 2009, and is continuing to grow."

The former Celtic Tiger economy has also been plagued by a domestic property market meltdown and soaring unemployment.

But Ireland escaped the downturn earlier this year, with gross domestic product (GDP) soaring 2.7 percent in the three months to March, compared with the final quarter of 2009, as exports soared on the back of a weak euro.

Monday's downgrade comes one week after the International Monetary Fund forecast that the Irish economy will grow by 2.3 percent in 2011 after escaping a painful recession earlier this year.

The severity of the deep downturn means the eurozone nation's GDP is still expected to shrink by 0.6 percent this year, according to the IMF.

Date created : 2010-07-19

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