Rating Agency Warnings Deepen Irish Debt Crisis

Tuesday, 28 Sep 2010 09:03 AM

 

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Two more credit rating agencies warned Ireland on Tuesday that its debt is at risk of further downgrades, triggering another leap in borrowing costs and heaping pressure on the government to bring forward its budget.

Ireland is battling to convince investors it can afford to shore up its banking sector and cut the biggest budget deficit in the European Union, given its weak economy and growing risks of a political crisis.

"I cannot pretend that the current rating is totally secure," Chris Pryce, a senior analyst with Fitch, which currently has Ireland at AA-negative with a stable outlook, told Reuters in an interview.

The government is hoping a final bill for dealing with nationalized lender Anglo Irish Bank, expected later this week, will clear up fears that the cost will vastly exceed a current estimate of 25 billion euros ($34 billion).

But Standard & Poor's said on Tuesday its estimate Ireland would have to pour 35 billion euros into Anglo Irish, a figure heavily criticized by local policymakers, looked increasingly realistic and any amount beyond that could trigger rating downgrades.

Coming a day after credit agency peer Moody's slashed its ratings on Anglo Irish's lower-grade debt, S&P's fresh warning sent Irish credit premiums and the cost of insuring Irish debt from default to new highs.

The news also drove the premiums investors demand to hold bonds from other economies on the euro zone periphery to new highs.

The OECD's chief economist told Reuters he did not see Ireland heading towards a Greek-style crisis.

Ireland's rising borrowing costs are unsustainable over the medium term and are putting mounting pressure on Prime Minister Brian Cowen as he heads into a new parliamentary term on Wednesday, with his coalition and deficit-cutting mandate shaky.

Some analysts have said Cowen needs to speed up the budget announcement.

"The costs are rising because of policy inaction on behalf of the incumbent government," said Ciaran O'Hagan, bond strategist with Societe Generale.
"The French budget is being published tomorrow, the Irish budget is being published in December. They are going to give a pre-budget statement in the second half of October, that's a month away."

Cowen, who recently shook off calls to resign after a boozy night out, was blasted by Irish tabloids on Tuesday after U.S. talk-show host Jay Leno ridiculed him as a "drunken moron".

ONE MORE SHOT?

Fitch's Pryce said the government's wafer-thin parliamentary majority, which could fall from four to two, was a worry but Cowen still had time to reassure investors with the final bill for Anglo and tough budget measures.

"Further downgrades may be avoided," he said. "The Irish government has at least one more shot in its bow."

But O'Hagan said the credibility of the Anglo bill was dependent on the outlook for the Irish housing market, where prices are in some cases half their peak and still dropping.

"Even if the government does come out with a number, the only thing that will make it believable is if there is some sort of prospect of stability for the housing market."

The 25 billion euros of aid so far earmarked for Anglo Irish would already push Ireland's 2010 budget deficit to around 25 percent of gross domestic product, compared with an EU limit of 3 percent that Dublin aims to reach by 2014.

Dublin has said the budget blow-out is a one-off due to European accounting rules and the impact of the Anglo bill would be minimized by spreading the cost over at least a decade.

But investors remain unconvinced about the plan to wind down Anglo via a split into a "funding bank" and an "asset recovery bank", and the cost of insuring Irish sovereign debt against default hit a record high of 519 basis points.

The premium investors demand to hold 10-year Irish government bonds rather than euro zone benchmark German Bunds widened by five basis points on Tuesday to hit a euro lifetime high at 475 bps before easing back to 468 bps.

On Dublin's main thoroughfare O'Connell Street, recession-weary city residents were equally downbeat.

"It feels a bit doom and gloom again, like things are getting out of control," said Darragh, 23, a recently graduated engineering student who is looking for work.

Ratings agency Moody's downgraded Anglo Irish's unsecured senior debt on Monday, citing a small residual risk the government might not support this debt.

A finance ministry spokesman said on Tuesday Ireland will honor its obligations to senior bondholders.

Analysts expect the government to buy back Anglo's 2.4 billion euros in subordinated bonds at a discount. The paper has been trading at a deep discount in the secondary market.

© 2014 Thomson/Reuters. All rights reserved.

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