Ireland credit rating downgrade ‘flawed’
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Ireland’s government faced mounting pressure on Wednesday to draw a line under its banking crisis after Standard & Poor’s cut the country’s long-term credit rating by one notch to ‘AA-‘.
REUTERS - Ireland’s government faced mounting pressure on Wednesday to draw a line under its banking crisis after a credit rating cut from Standard & Poor’s pushed its borrowing costs higher.
After winning plaudits for moving quickly to tackle its deficit, Ireland is once again at the centre of European debt fears with investors demanding a whopping 346 basis point premium to hold Irish 10-year debt over German Bunds, the highest level since the Greek financial crisis gripped in May.
S&P cut Ireland’s long-term rating by one notch to ‘AA-‘ on fears of a substantially higher bill for supporting the banking sector and assigned a negative outlook, meaning another cut is likely over the next one or two years.
Markets want Ireland to put a final price on purging its banks of a decade-long property binge but the head of Ireland’s debt management agency said that was impossible before the year-end when the state-run « bad bank » will have largely completed its purchase of their commercial property loans.
"It’s a bit like waking up the patient in the middle of an operation to tell him he’s not feeling well," John Corrigan, the chief executive of the National Treasury Management Agency (NTMA) told Reuters Insider television.
"We know the situation is pretty painful but we have to get to the end of the operation which will be in December."
S&P hiked its estimate of the cost to the government of recapitalising the banks at 45-50 billion euros ($63 billion), a figure dismissed by the debt agency in highly unusual criticism.
Corrigan described S&P’s analysis as "flawed".
But the downgrade, and the possibility of more to come, weighed on European shares and Irish financial stocks.
Fellow euro-zone peripheral Portugal managed to raise 1.3 billion euros in bonds on Wednesday but demand was below Ireland’s auction last week and the cost of protecting Irish and Portuguese debt against default rose.
Ireland will likely have to shell out a higher price in a treasury bill auction on Thursday and S&P’s cut raises the stakes for Bank of Ireland next month when it is expected to tap the public debt markets in a crucial test for the sector and wider economy.
Fiscal progress overshadowed
Rating agencies have been steadily hacking away at Ireland’s credit rating and S&P’s is now on a par with Fitch and one notch below Moody’s, which cut its rating to Aa2 last month. Unlike S&P, both Fitch and Moody’s have stable outlooks.
Fitch said on Wednesday its ‘AA-‘ rating remained « robust enough » to cope with Ireland’s problems, including Anglo Irish.
"I still think now that the two notch cut to AA- was sufficient to justify a stable outlook," said Fitch Ratings’ senior analyst Chris Pryce.
Prime Minister Brian Cowen has been lauded for tackling the worst state deficit in Europe but a steadily rising bill for bailing out nationalised lender Anglo Irish Bank - from 4.5 billion euros last year to an estimated 22-25 billion at present - threatens to eclipse his fiscal achievements.
The extra top-ups for Anglo Irish Bank and two building societies will likely push the country’s budget deficit over 20 percent of GDP this year from 14 percent in 2009.
Officials have been at pains to point out Ireland is not facing a Greek-style fiscal meltdown and the blow-out in the budget is a one-off in EU accounting terms while the actual cost of bailing out Anglo is spread out over up to 15 years.
But market fears mean that Cowen will be under even more pressure to shrink the underlying budget in the face of an already stretched and unhappy electorate and tensions within his own party and the wider coalition.
Despite his razor thin majority, Cowen is broadly expected to push through his fourth austerity budget this December because neither his party nor the minority Greens want to face the wrath of voters at an early parliamentary election.
"Their majority is precarious but I don’t see them voluntarily offering themselves up," said Neil Collins, a professor of politics at University College Cork.
Much of the certainty that investors are seeking is out of Cowen’s control.
They may get some answers next month.
A European Commission decision on Anglo’s restructuring plan, some details of Allied Irish Bank’s capital-raising asset sales, the Irish banks’ refinancing of around 25 billion euros in redemptions and a possible Bank of Ireland public bond are all expected in September.