Blow to Ireland as Moody's cuts rating
Dublin, December 18, 2010
Moody's slashed its credit rating on debt-stricken Ireland following the country's huge international bailout and as the European Union battled to safeguard the euro.
Moody's Investors Service cut its rating on the euro zone member by five notches from Aa2 to Baa1, citing increased uncertainties over the country's economy and public finances. Moody's added that the Baa1 rating outlook was negative.
Moody's action follows similar but less drastic ratings downgrades on Ireland by its peers, Standard & Poor's and Fitch, adding to the pressure as investors demand a higher return to buy Irish government bonds.
Following Moody's move, markets pushed up the yield, or rate of return, on Irish benchmark 10-year government bonds to 8.334 per cent from 8.279 per cent on Thursday.
'Moody's has ... become the third of the three major ratings agencies to downgrade Irish sovereign debt in the past four weeks. It has, however, outdone the other two with the scale of the downgrade,' said Goodbody Stockbrokers analyst Dermot O'Leary.
Ireland had to seek an 85-billion-euro ($113 billion) rescue package from the European Union and International Monetary Fund as massive debt and deficit problems left the country on the verge of collapse.
In an International Monetary Fund report on the bailout published yesterday, the Fund noted that 'a comprehensive bank restructuring programme is critical' in Ireland in the near term.
Meanwhile, the European Central Bank and Bank of England unveiled a currency swap facility worth £10 billion to aid Ireland, which does a lot of business with Britain and so needs to borrow or buy large amounts of sterling.
It followed an agreement by EU leaders on Thursday to sanction treaty changes to allow a permanent rescue mechanism for euro zone member states, hoping to tame a debt and deficit crisis threatening the single currency.
After Greece and Ireland, the markets have put Portugal and Spain in the firing line, driving the EU debate on what can and should be done to head off a wider crisis.
Moody's yesterday said its downgrade on Ireland reflected the problems in the Irish banking system, the 'increased uncertainty regarding the country's economic outlook; and ... the decline in the Irish government's financial strength.'
The negative outlook on the ratings 'is based ... on the risk that the Irish government's financial strength could decline further if economic growth were to be weaker than currently projected or the costs of stabilising the banking system turn out to be higher than currently forecast,' it added.
On the positive side, Moody's noted the Irish economy's competitiveness, its business-friendly tax environment and flexible labour market.