Moody's Downgrades Ireland by Five Steps, Keeps Negative Outlook

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Credit rating company Moody’s downgraded Ireland’s debt by several notches Friday, following through with its earlier warning that Ireland’s deteriorating financial situation would most likely result in a multi-step downgrade.

Moody’s now gives Ireland’s debt a rating of “Baa1,” down five steps from the country’s previous rating of “Aa2,” with a negative outlook. The five-step downgrade still keeps Ireland’s investment grade status, which is important because mutual funds, insurance companies and pensions are often required to invest in investment-grade debt.

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Moody’s analysts said the “crystallization” of Ireland’s bank liabilities combined with a deteriorating government balance sheet were the primary reasons for the rating downgrade. The agency now expects Ireland’s debt ratio to balloon to 120% of GDP in 2013 compared with the 66% of GDP last year. With other government programs included, Ireland’s debt could rise to as much as 140% of GDP.

“While the government's debt-to-GDP burden is expected to be high by EU standards, Ireland has managed high levels of indebtedness in the past, and has shown political cohesion and commitment to enacting difficult fiscal consolidation measures,” Moody’s analysts said in a statement.

Moody’s said it decided to keep Ireland’s investment-grade status because it appears that there is political willpower to institute government austerity measures.

“Ireland's commitment to fiscal consolidation and structural reforms is impressive,” Moody’s said.

Moody’s placed Ireland’s debt on review for possible downgrade in early October and earlier downgraded the country’s debt to the then “Aa2” rating in mid-July.

The agency kept a negative outlook on Ireland’s debt, citing a possibility that government financial stabilization measures could become insufficient and the continued market pressure on countries like Ireland.