Ireland unlikely to default despite cut

IRELAND is highly unlikely to default on its burgeoning national debt despite a second downgrading in 90 days of the state’s sovereign debt rating.

Royal Bank of Scotland’s senior bond strategist, Harvinder Sian, in London said: “Ireland has many, many problems and we continue to view it as the weakest fiscal risk in the European Monetary Union.

“But investors should not leap to the view that this is an Iceland in disguise.

“Ireland has a policy response in place and it also has the European Central Bank facilities to turn to.”

Standard & Poor’s cut Ireland’s credit rating to AA from AA+. The rating company assigned a “negative” outlook to the grade, indicating it’s more likely to cut it again than leave it unchanged or raise it. S&P cut Ireland’s coveted sovereign AAA rating in March this year.

S&P said Bank of Ireland and AIB will need more Government investment. The rating agency said the cost of rescuing Irish banks may rise to as much as€25 billion, against its previous forecast of between €15bn and €20bn.

In response, Finance Minister Brian Lenihan insisted his policies were putting the economy on the right track.

He said: “It is important we communicate a balanced perspective about Ireland and its economic, budgetary and financial situation and prospects.”

And in a unusual move rival ratings agency Fitch said Ireland may need to hold a parliamentary election to give a new government a fresh mandate to pursue its policies.

Chris Pryce, a director at Fitch, told Reuters: “It may be that an election is needed to give a new government moral authority.”

Mr Pryce said the governing parties’ electoral losses were not something to worry about, as a possible change in government from a Fianna Fáil led coalition to one led by the main opposition party, Fine Gael, would not signal a radical shake-up in policy.

Mr Pryce said Fitch, which downgraded Ireland to AA+ in April and kept the outlook on negative, was closely monitoring the country’s monthly tax revenues, which have started to come in on target since Dublin hiked tax rates in an emergency budget in April.

“If each month they more or less hit the target for the year... then I am not saying we won’t downgrade but there are arguments for saying perhaps we shouldn’t, but it is very uncertain,” Mr Pryce said.

And Rossa White, chief economist with Davy’s Stockbrokers, said: “The political situation is clearly the key risk in Ireland.”

Meanwhile, Moody’s said it has placed the ratings of mortgage-backed promissory notes issued by of ICS Building Society, AIB Mortgage Bank, Irish Life and Permanent and Bank of Ireland Mortgage Bank on review.

* Additional reporting Bloomberg and Reuters.