RATINGS AGENCY Standard & Poor’s now believes the upfront cost of bailing out the banks will be at least €50 billion – its estimate for the maximum initial cost just three months ago. The agency yesterday cut the Republic’s credit rating by two notches.
Rescue loans of between €80 billion and €90 billion from the European Union and the International Monetary Fund should help prevent a run on the banks, the agency’s analyst Frank Gill said.
However, he warned that the fund would not reduce the Government’s contingent liabilities to the banks as wider economic pressures and rising unemployment would lead to higher loan losses.
“The fate of the Government and the fate of Ireland’s banking system are really one and the same,” said Mr Gill, citing the guarantee over bank liabilities worth 95 per cent of GDP, excluding the guarantee on retail deposits.
Ireland’s rating was placed on credit watch, meaning that there is a 66 per cent chance of a further downgrade within a month. It could be cut again if the economy suffered a setback, the EU-IMF plan failed to stop outflows from banks or if political consensus on the budget plan weakened, said Mr Gill.
“There’s no question that economic projections for Ireland are highly uncertain at this point,” Mr Gill said. “Given how open the economy is, a lot is going to depend on external demand.”
The agency downgraded the country’s long-term rating from ‘AA-’ to ‘A’ – six notches above “junk” status in terms of creditworthiness – and six below its top AAA-rating, which Ireland lost in 2009 after holding it for eight years.
The upfront cost of the banks amounted to 32 per cent of GDP, said S&P. The additional needs for the banks could be as much as 7 per cent of economic output.
“Our previous maximum has become the new minimum cost,” said Mr Gill of the upfront estimated cost of rescuing the banks.
S&P expects the general Government debt to rise to 124 per cent of GDP at the end of 2011 from 68 per cent at the end of last year.
The agency said nominal economic growth would be flat over the next two years, challenging the Government’s view in yesterday’s four-year economic recovery plan that there would be 7 per cent growth from 2010 to 2012.
Mr Gill said deflation and the “overhang of debt” would weigh on consumption and investment.
Yesterday’s downgrade came after it emerged that the €85 billion EU-IMF Irish bailout would overcapitalise the banks to a core tier one capital ratio – a measure of financial strength – of 12 per cent from an earlier level of 8 per cent.
Mr Gill said the Government was “now one of the largest landlords” in the State through the National Asset Management Agency but that it was “very difficult” to put a value on the assets.
S&P’s banking team was trying to value the assets, he said, and the more quickly the Government moved to sell Nama properties, the better.
S&P also said its action on the Irish sovereign rating could have a negative impact on Ireland-based insurers because of their potential exposure to State debt or local banks.
