Ireland’s long-term sovereign credit rating was cut one step to AA- by Standard & Poor’s on concern about the rising cost of supporting the country’s struggling banks.
S&P raised its estimate for recapitalizing the banking system to as much as 50 billion euros ($63 billion) from a previous estimate of as much as 35 billion euros. The rating is the lowest since 1995, according to data compiled by Bloomberg.
“A further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government’s ability to meet its medium-term fiscal objectives,” S&P said in a statement yesterday.
Ireland has suffered the worst recession on record as a decade-long housing boom ended and the financial system came close to collapse. Prime Minister Brian Cowen is now trying to convince investors the country can shoulder the cost of rescuing Anglo Irish Bank Corp., nationalized last year as bad debts surged.
“They’re going to pay very high yields for a prolonged period of time,” Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington, said in an interview. “The misfortune for Ireland is not only have they had an incredible housing bust, they have also had a very poorly regulated banks and that sets them quite apart” from a country such as Spain.
The downgrade comes as a slowing global economy prompts traders to dash for the safety of U.S. Treasuries and German bunds. The extra yield demanded by investors to hold 10-year Irish government bonds over German counterparts yesterday rose to a record of 318 basis points, 12 points higher than their level before a European Union-led rescue plan for the euro region was announced on May 1.
Ireland’s debt agency said in a statement that S&P’s analysis is “flawed” and that its decision was based on an “extreme” estimate of bank recapitalization needs. It also said that the country is fully funded into the second quarter of 2011. A spokesman for the finance ministry said Ireland still plans to cut its budget deficit to below the EU’s limit of 3 percent of gross domestic product by the end of 2014.
S&P said its new projections suggest that Ireland’s net general government debt will rise toward 113 percent of gross domestic product in 2012. That’s more than 1.5 times the median for the average of euro zone sovereign nations, and “well above” the debt burdens the New York-based firm said it projects for similarly rated countries in the region such as Belgium at 98 percent and Spain at 65 percent.
The spreads on Spanish and Irish bonds have risen above the levels touched in May, when the Greek fiscal crisis prompted the European Central Bank to buy government bonds for the first time. ECB council member Axel Weber signaled in an interview on Aug. 19 that he’s relaxed with current yields, saying that the bond purchase program was designed to smooth tensions in bond markets rather than set a floor to prices.
Irish counterpart Patrick Honohan said a day later that the Anglo Irish issue must be resolved soon because of the impact it is having on investors. Supporting the bank may result in a net cost of about 22 billion euros to 25 billion euros to the Irish government, he said.
“This is a matter which will need to be finally put to rest very soon,” Honohan said in Tokyo. “The uncertainty around it is having a disproportionate impact on international investors.”