Rating agency says ability to finance debt deteriorating

MOODY’S rating agency said its Aa1 rating it put on Government bonds in July has moved to “negative” in the meantime.

That shift reflects a further, gradual deterioration in both its debt affordability and its ability to finance those borrowings in the years ahead.

“Ireland’s ability to reverse negative debt dynamics in a non-supportive global environment will also be tested,” it warned in its annual report.

Overall, the situation for Ireland’s debt “will remain unfavourable for several years, and the downside risk outweighs any upside potential in the near/medium term”, the report said.

Although Ireland is not alone in seeing a sharp deterioration in its credit situation it is hampered by lack of economic scale.

Ireland’s situation was made worse by weakness in its core activities, such as construction and financial services, that has made the economy more vulnerable than larger Aaa rated economies “facing similar structural challenges”.

Before the onset of the crisis, Ireland’s economic success was based on the attraction of considerable foreign direct investment (FDI) and a boom in financial services and real estate.

Investors were “lured” by Ireland’s business-friendly environment, favourable demographics and EMU membership, it said.

Banking and housing became the country’s engines of growth, propelled by low interest rates and low risk aversion, it said.

“In the current crisis, however, economic activity is contracting on the back of a severe correction in the housing market, a troubled banking system, faltering consumption in connection with increased job uncertainty, and a steep decline in investment.”

Export growth has also been slowing while crucially economic activity is depressed by the sharp correction in construction, a credit squeeze and the high level of domestic borrowing.

For those reasons the economy will struggle and that will continue to undermine key ratings gong forward, Moody’s said.

In a separate report, Ciaran Kane, head of treasury at Barclays Ireland predicted the weakness in the economy will hamper economic growth out to 2013.

“We remain less pessimistic regarding the Irish economic outlook and expect real GDP to fall 7.1% this year and a further 0.3% next year.

“Our relative optimism stems largely from our forecast of significant positive contribution from net exports, as the global economy recovery gains momentum in 2010,” he said.