Credit agency Moody's has downgraded Ireland's government bond ratings to Aa2, blaming banking liabilities, weak growth prospects and a substantial increase in the debt to GDP ratio.
However, Moody's lead analyst for Ireland Dietmar Hornung said it was a "gradual, significant deterioration, but not a sudden, dramatic shift", and the agency believed Ireland has "turned the corner".
The general government debt-to-GDP ratio was at 64 per cent at the end of last year, up from 25 per cent before the financial crisis took hold, and is continuing to rise.
“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,” said Mr Hornung.
The support provided to the banking system, which includes the transfer of billions of euro worth of loans from banks to the National Asset Management Agency, was also cited as a key factor in the rating downgrade. Recapitalisation measures already announced may reach €25 billion, the agency said, but Anglo Irish Bank may require further support.
"While we do not expect the government - not even in a moderately stressed scenario — to incur permanent losses in excess of 25 per cent of the country’s 2009 GDP as a result of these obligations, we believe that the uncertainty surrounding final losses would exert additional pressure on the government’s financial strength," the agency said in a statement.
The move comes just over a year after Moody's last downgraded the country's rating. On July 2nd 2009, the agency gave the bonds a Aa1 rating, with a negative outlook.
However, the outlook was today changed to stable, with Moody's now viewing the upside and downside risks as evenly balanced at the current rating level.
The agency said it expect expects economic growth to be below historical trend over the next three to five years due to the weak banking and real estate sectors, and the fall in private sector credit.
“If the GDP growth trend were to exceed Moody’s expectations - with a quick resumption of domestic credit flow and a supportive global economic environment — then the government’s debt metrics could stabilise earlier than is currently being assumed,” said Mr Hornung.
General government debt-to-GDP ratio is expected to stabilise at 95 per cent to 100 per cent over the next two to three years, Moody's said.
"Given Ireland’s wealthy and flexible economy and its very high institutional strength, these debt levels are commensurate with a Aa2 rating. Ireland’s demonstrated adjustment capability and its economic vitality — reflected for instance in its ability to attract foreign direct investment — are important characteristics that support the rating," the agency said.
Taoiseach Brian Cowen criticised the “pervasive negativity” in relation to the report from media commentators.
He said: “I would ask the media to look at all of the report. We have had enough of this pervasive negativity all the time trying to take a bad interpretation of a report which is in fact supportive of what the Government is doing.”
Howerver, Fine Gael's deputy finance spokesman Kieran O'Donnell said it was a vote of no confidence in the Government's economic and banking strategy.
“The Government’s disastrous banking strategy already means that Ireland now has the highest deficit in the EU since the Second World War," he said.
“Now Moody’s decision shows that international markets appreciate the massive costs associated with the Government’s plan to pour €25 billion into the black holes of Anglo Irish Bank and Irish Nationwide."
Sinn Féin finance spokes man said the downgrade would be crippling for the whole economy, with the higher cost of borrowing leading to further restrictions in credit for small businesses and households.
“The cost of borrowing will increase for the Irish Government as a result of their unfettered allegiance to an ailing banking system and especially the zombie Anglo Irish bank. Once more, the inadequacy of Government policy concerning the banks has been revealed," he said.
“The Government’s home grown crisis, which has produced weak banking and property sectors, is once more curbing economic growth."
Despite the downgrade of bonds, Ireland is likely to sell the full allotment of up to €1.5 billion of 2016 and 2020 bonds tomorrow, ING Groep NV said today.
The sales "are likely to go well in line with the Portuguese auctions last week, given the large concession priced in", senior debt strategist Wilson Chin wrote in a research note today.
"The supply will be rather light this week."
The spread between Irish and German 10-year government bonds was at 286 basis points this morning.
Additional reporting: Bloomberg
