THE €24 BILLION bank recapitalisation plan is positive for the Ireland’s financial sytem but negative for the sovereign, credit rating agency Moody’s has said, highlighting the possibility of another downgrade.
Moody’s warning yesterday comes on the heels of Standard Poor’s one-notch downgrade of Irish debt and Fitch’s flagging of another rating cut amid concerns about the euro zone struggler’s ability to deal with one of the world’s costliest bank bailouts.
Ireland is hoping it can avoid tapping any EU or IMF loans for the capital infusion by using €17.5 billion in existing state funds, raising about €5 billion through discounted buybacks or swaps of subordinated bank bonds and selling assets.
“The capital increase is a clear credit positive for the banks,” Moody’s said in a note. “However, the additional recapitalisation costs that arise to the government in connection with the PCAR are credit negative for Ireland’s sovereign creditworthiness.”
Moody’s rates Ireland Baa1 with a negative outlook, meaning that a downgrade is possible. It expects Irelands gross debt to increase by €2 billion as a result of the recapitalisation, the fifth in two years.
Efforts to draw a line under a banking crisis, now in its third year and the trigger for the EU-IMF bailout, have drawn praise.
Morgan Stanley recommended a buy on long-dated Irish bonds yesterday on the basis the stress tests were credible and would facilitate an economic turnaround.
“With the banking system being the main cause of the investor concern . . . the results of the bank stress tests released last week and the subsequent policy actions taken by the Government could well mark a turning point,” the bank stated in a research note.
Traders said some investors were inquiring about Irish 2025 paper, trading at about 70 cent on the euro and cited by Morgan Stanley as a preferred buy.
“Morgan Stanley’s logic is that if you . . . have some sort of a restructure, it’s unlikely that it’s going to be below 70 cent so your downside is probably pretty limited,” said Gavin Curran, bond trader with Dolmen Securities. “That will appeal to a certain type of investor. Overall though . . . volumes are quite low.”
Some investors think borrowing from a new European rescue fund is likely. It is due to be up and running in 2013, when Ireland’s existing bailout expires, and there are concerns that sovereign debt restructuring will be a precondition of borrowing from this fund.
The premium investors demand to hold Irish 10-year paper over benchmark German bunds was 663 basis points yesterday, four basis points lower from Friday. – (Reuters)
