S&P could cut ratings again if bank bailout costs increase

IRELAND could face a further downgrade from Standard & Poor’s (S&P) as the ratings agency expects the country to inject as much as €35 billion into Anglo Irish Bank “over time”.

S&P said it was downgrading Ireland’s long-term sovereign credit rating one step to AA- on concern about the rising cost of supporting the country’s struggling banks. This is Ireland’s lowest rating since 1995.

A lower rating can make it more expensive for a government to borrow money on the markets. which is a vital tool for countries like Ireland that need to finance large deficits.

National Treasury Management Agency (NTMA) head John Corrigan slammed the latest downgrading, saying it was flawed.

S&P raised its estimate for recapitalising the banking system to as much as €50bn from a previous estimate of €35bn. However S&P defended its downgrade, saying its estimate of a €35bn bill for bailing out nationalised lender Anglo Irish was conservative.

“Our previous estimate had been overshot by a wide margin. We are hoping that this, which is still a relatively conservative estimate with regard to Anglo, will not be overshot again,” said analyst Trevor Cullinan.

The cost of insuring against default on Irish bank bonds approached the highest in a year on concern credit rankings will be cut after S&P downgraded the Government.

Credit-default swaps on the senior debt of Anglo Irish Bank increased 13.5 basis points, to 581, according to data provider CMA, meaning it costs €581,000 annually to insure €10 million of the lender’s bonds for five years. Contracts on the bank’s subordinated notes rose €100,000 to €1.8m upfront and €500,000 annually.

The NTMA pointed out that Ireland maintains an AA rating from other rating agencies: Moody’s, Fitch, R&I and DBRS.

The rating applied to Ireland today by S&P is higher than its ratings for Portugal, Italy and a number of other EU countries, according to the NTMA.

However S&P said the rating could be cut again if the costs of the bailout rise or the economic recovery becomes more sluggish.

Meanwhile, German 10-year government bond yields stayed near the lowest on record after S&P lowered Ireland’s credit rating, stoking demand for the safest assets.

Thirty-year German yields slid to a record low. Bunds fell earlier after a report said German business confidence unexpectedly rose in August.

“Ireland is in the firing line after the downgrade and that’s helping German bunds,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets. “Risk aversion is the main theme, with growing worries about the outlook for the US economy and fears that we could go back into recession.”

Irish bonds fell, with the yield on the 10-year bond rising 12 basis points to 5.6%, while two-year yields climbed 53 basis points to 3.73%.

The extra yield investors demand to hold Irish 10-year bonds instead of their German equivalents widened 13 basis points to 332 basis points, a second straight record.

The NTMA said “investors continue to show strong demand for Irish Government debt”.

It claimed that S&P’s outlook was based on an “extreme” scenario of the cost of recapitalising the banks.

S&P cut the rating one step to from AA to AA-, its lowest since 1995.

Also yesterday S&P revised its outlook on KBC Bank Ireland to stable on the likelihood of continued sound capitalisation.