The Irish Government suffered insult in the bond markets after injury in the polls when Standard & Poor’s (S&P) said yesterday that the soaring cost of rescuing the country’s banks had reduced Dublin’s creditworthiness.
The agency cut the rating on Ireland’s sovereign debt for the second time in three months and said that it might suffer a further downgrade. The credit rating slippage from AAplus to AA came after Fianna Fail, Ireland’s ruling political party, suffered a heavy defeat in local government and European parliamentary elections.
The critique from S&P, which said that the Irish taxpayer would have to bear even higher costs in supporting the country’s banks, is a further blow to Brian Cowen, the Prime Minister. His Government faces a no-confidence motion, expected to be tabled today by Fine Gael, the main opposition party. The Irish electorate hammered Fianna Fail and the Green Party, its coalition ally, in polls last week. The elections were widely regarded as a referendum on the Government’s handling of the Irish economy, which went into a tailspin last year, requiring a huge bailout of the country’s banks. Fine Gael secured 80 more local government seats than Fianna Fail and the ruling party suffered humiliating defeats in two Dublin by-elections for seats in the Dail, the Irish parliament.
Ireland’s credit downgrade weighed heavily on the euro, forcing the single currency down 0.7 per cent against the dollar. Meanwhile, Irish government bonds fell and the cost of insuring the country’s debt rose in response to the downgrade. The yield differential between Irish sovereign debt and the German bund is now just over two percentage points.
Brian Lenihan, the Irish Finance Minister, brushed off the rating action as a reaction to past events and insisted that government policy was on the right track. The rising cost of bailing out Ireland’s banks is being blamed for the deteriorating quality of Ireland’s credit and record losses at the banks. The Government plans to set up a “bad bank”, the National Asset Management Agency (Nama), to take on €90 billion of toxic mortgage debt held by the main lending institutions, including Bank of Ireland and Allied Irish Banks.
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S&P first removed Ireland’s triple-A rating in March and the agency said yesterday its second rating cut had come after an assessment of the cost to the Government of the bailout, which it believed would be “significantly higher” than expected. David Beers, S&P’s credit analyst, said: “Our revised opinion follows the recent announcement by Anglo Irish Bank of losses at the upper end of Standard & Poor’s expectations.” Under the Government’s scheme, Nama will buy the debt at a heavy discount to its value with money raised by the issue of government bonds. Yesterday S&P questioned the viability of the Irish Government’s plans.
“We consider that Nama’s ability to meet its financial objectives is uncertain because of the risk that cashflows from its assets could fall below its funding costs,” the rating agency said.
S&P expected the Irish economy to stagnate until 2013, with the result that government debt could exceed 100 per cent of GDP over the medium term. Mr Beers said: “The rating could be lowered again if asset quality in the Irish banking system deteriorates at a faster pace than we expect.”