Moody’s Cuts Ireland Rating to ‘Junk’ Status

Reuters

Moody's Investors Service on Tuesday cut Ireland's credit rating to junk status, saying the country will likely need further official financing before it can return to international capital markets.

Chances that European policy makers will force the private sector to share the burden of future bailouts also weighed on Moody's decision, as the agency believes that decision would drive borrowing costs higher for weaker euro zone members.

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"The prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt. This is a key factor in Moody's ongoing assessment of debt-burdened euro area sovereigns," the ratings agency said in a statement.

Moody's cut Ireland's ratings by one notch to Ba1 from Baa3 and kept a negative outlook on the rating, which means further downgrades are likely in the next 12 to 18 months.

The downgrade is the first blush Ireland has with junk status. Both Standard & Poor's and Fitch Ratings have Ireland at BBB-plus, three notches above junk status.

The cut came well after European bond markets were closed, on a day when the yield spread for Irish government 10-year debt had narrowed slightly against its German equivalent.

Spreads had narrowed modestly to 1,080 basis points from Monday's recent high of 1,102 bps over the German benchmark.

Earlier on Tuesday, peripheral euro zone government bonds recouped losses and rallied as talk of central bank buying of some lower-rated debt and the prospect of a new European Union crisis meeting prompted profit-taking in benchmark German Bunds.

In its statement, Moody's said: "The key driver for today's rating action is the growing possibility that following the end of the current EU/IMF support program at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market."

"We've had a lot of downgrades recently and this one-notcher doesn't seem to be the proverbial straw that breaks the camel's back," said Chris Rupkey, managing director and chief financial economist at Bank Of Tokyo/Mitsubishi UFJ in New York.

"The market may have bigger fish to fry here and is waiting for the (European Union) bank stress tests later in the week and the EU finance meeting on Friday which is looking at the widening of the crisis.

The firm said that while Ireland is showing a strong commitment to a fiscal consolidation plan and has delivered so far on its objectives, the continued weakness in the Irish economy means the risks to implementing the full program "remain significant.

A further downgrade in Ireland's rating would be considered if the government can't meet its fiscal consolidation goals.

"A further deterioration in the country's economic outlook would also exert downward pressure on the rating, as would further market disruption resulting from a disorderly Greek default," the firm said.

Greek sovereign 10-year spreads closed Tuesday at 1,418 bps, down from 1,455.4 bps on Monday.

"Although Ireland's Ba1 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the increased possibility of private sector participation has the effect of further discouraging future private sector lending and increases the likelihood that Ireland will be unable to regain market access on sustainable terms in the near future," Moody's said.

Ireland's credit rating remains six notches above Greece and one notch above Portugal on the Moody's scale. Italy is eight notches above Ireland at Aa2.