Rating downgrade less severe than was feared

IRELAND has been stripped of its last ‘A’ rating based on future risks to bondholders, but the one-notch cut was less severe than feared and gave the thumbs up to the State’s bank bill.

Standard & Poor’s, whose rubbishing of a previous “final bill” for Ireland’s banking sector sent the country’s debt crisis into overdrive last year, said the assumptions underlying the latest round of stress tests were robust.

They changed their outlook to stable, meaning no further downgrades in the pipeline.

“It’s as positive as a downgrade can be,” said Eoin Fahy, economist at Kleinwort Benson Investors.

“I would take that as distinctly positive. The fact that they moved us to stable is significant and the language they have used is encouraging. I was worried we would see two or even three notches (cut).”

The premium investors demand to hold Irish debt over benchmark German paper narrowed by 12 basis points to 6.72%.

S&P now rates Ireland BBB+, above fellow euro zone strugglers Portugal and Greece, in line with rival agency Fitch, which also has a stable outlook. Moody’s rates Ireland Baa1 with a negative outlook.

S&P said it expected the Irish economy would gradually recover after a three-year contraction and its reliance on external trade meant that it had better growth prospects than Portugal and Greece.