In a spate of recent moves by Moody’s to downgrade ratings of several European countries, it is Ireland in question now.
Moody’s Investors Service Inc. downgraded Ireland’s government debt by two notches Friday, taking the country to the brink of junk status, ?indicating that Allied Irish Banks, Bank of Ireland, Anglo Irish, Irish Life Permanent (ILP), and EBS Building Society now all carry a ?negative outlook?.
The agency, cutting Ireland’s bond ratings to Baa3, one notch above junk, from Baa1, said it was responding to a likely deterioration in Ireland’s fiscal position due to weak prospects for economic growth and higher borrowing costs as a result of rates raised by the European Central Bank.
According to Moody?s, the rationale for the move was to bring the debt in line with the downgrade of the Irish Government bond rating.
The other ratings of the five banks – including the bank deposit ratings, the senior unsecured debt ratings and the stand-alone bank financial strength ratings – are unaffected by this rating action, Moody?s said.
However, the first quarterly review of Ireland’s economic reform program by the European Union, ECB and International Monetary Fund shows the country is on track, but not in the clear.
“The teams’ assessment is that the program is on track but challenges remain and steadfast policy implementation will be key,” the three bodies said in a joint statement Friday. The EU, ECB and IMF said Irish authorities “reaffirmed their strong commitment” to fiscal consolidation during the April 5-15 review.
?As a result of the high level of uncertainty around whether the Irish Government would extend further support to the banking sector if required – beyond the ?35 billion already committed to as part of the EU-IMF support package – Moody?s no longer incorporates systemic support into the senior unsecured debt ratings, and these are placed at the same level as the stand-alone ratings of the banks,? Moody’s said.
Moody?s also warned if the credit risk for unguaranteed senior unsecured debt was to increase – either because of further economic decline or because of policy changes implying a greater willingness to impose losses on bondholders – then the banks? unguaranteed senior unsecured debt ratings would likely face further downgrades.
The Ireland downgrade is the latest in a series of downgrades issued by Moody’s and other rating agencies on countries along Europe’s fiscally-weak periphery. Ireland and Greece have both been cut despite being supported since last year by a bailout program from the EU and the IMF. Portugal applied for a similar rescue earlier this month.
Irish and European authorities had hoped that Moody?s would not follow through on an earlier warning that it would further downgrade Irish debt.
Sources: Irishtimes, WSJ