Ireland’s credit rating was cut five levels by Moody’s Investors Service and further downgrades are possible as the government struggles to contain losses in the country’s banking system.
The rating was lowered to Baa1 from Aa2, Moody’s said in an e-mailed statement from London today. That’s three levels above non-investment grade and the same level as countries including Russia and Lithuania. The outlook on the rating is “negative,” Moody’s said.
Irish lawmakers on Dec. 15 voted to accept an 85 billion-euro ($113 billion) aid package from European governments and the International Monetary Fund to stabilize the country’s finances. Moody’s said that confidence in Irish banks “evaporated” in the run-up to the bailout.
“While a downgrade had been anticipated, the severity of the downgrade is surprising,” Glas Securities, the Dublin-based fixed-income firm, said in an e-mailed note today.
As European governments struggle to stop contagion from Greece and Ireland to other nations, Moody’s this week said it may lower Spain from Aa1. It also placed Greece’s Ba1 rating on review for a possible downgrade. European Union leaders agreed at a meeting in Brussels yesterday to amend the bloc’s treaties to create a permanent crisis-management mechanism in 2013.
While Ireland’s government had said it’s fully funded through mid-2011, investors dumped the country’s bonds on concern that the cost of the bank rescue would swamp the state. Government figures on Nov. 28 showed that Ireland may spend as much as 83 billion euros, more than half of its gross domestic product, to support banks including Allied Irish Banks Plc.
The government plans to cut spending by about 20 percent and raise taxes over the next four years to narrow its deficit. The budget shortfall will be 12 percent of GDP this year, or 32 percent including a banking rescue, the government estimates.
“The austerity measures could have feedback effects on economic growth, on domestic demand, and that’s something that should be monitored,” Dietmar Hornung, an analyst at Moody’s, said in an interview. He said it is “very unlikely” that Ireland will default on its debt.
Irish borrowing costs initially rose after the bailout was agreed on Nov. 28, before declining. The extra yield investors demand to hold Ireland’s 10-year bonds rather than the German equivalent, Europe’s benchmark, widened to a euro-era record of 680 basis points on Nov. 30. It was at 533 at 9:09 a.m. in London, up from 521 yesterday.
“Ireland has managed high levels of indebtness in the past and has shown political cohesion and commitment to enacting difficult fiscal consolidation measures,” Hornung said. “The government is making considerable investments in its banking system that might ultimately generate income.”