Ireland joins Portugal and Greece as credit rating hits junk status

RATINGS agency Moody’s has cut Ireland’s credit rating to junk status, saying we will likely need further official financing before returning to the financial markets.

It means we are the third eurozone country to be lowered to junk, following Portugal and Greece.

The chances that European policymakers will force the private sector to share the burden of future bailouts also weighed on Moody’s decision, as the agency believes that decision would drive borrowing costs higher for weaker eurozone members.

“The prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt. This is a key factor in Moody’s ongoing assessment of debt-burdened euro area sovereigns,” the ratings agency said in a statement.

Moody’s cut Ireland’s ratings by one notch to Ba1 from Baa3 and kept a negative outlook on the rating, which means further downgrades are likely in the next 12 to 18 months.

The European Commission said it regretted the move. “It contrasts very much with the recent data, which support a return to GDP growth this year, and the determined implementation of the programme by the Irish government, which has taken strong ownership of it.”

The Department of Finance said: “It is important to point out that Ireland’s rating with all of the other major agencies — Standard & Poors, Fitch and DBRS — remains within the investment grade band.

“This is a disappointing development and it is completely at odds with the recent views of other rating agencies. Just last week, Fitch & DBRS noted our economy’s return to growth in the first quarter, the progress in reducing our budget deficit and said that there was no reason to alter their views on Ireland at this time.

“Given the timing of the Moody's announcement it is difficult to see how their decision reflects the agreement reached at the Eurogroup meeting to enhance the flexibility and the scope of the EFSF, and to lengthen the maturities of, and lower the interest rates on, loans to countries in receipt of financial support... We have met all the quantitative fiscal targets set so far under the EU/IMF Programme, most recently for end-June, and on foot of a €6 billion consolidation effort, are on track to achieve the deficit reduction target for the year as a whole.”

The National Treasury Management Agency said: “The NTMA notes that Moody’s decision was primarily driven by their concern about the prospect of private investor participation in future financial support programmes in the euro area. Moody’s acknowledges that Ireland has demonstrated a strong commitment to fiscal consolidation and is successfully delivering on its objectives as required under the EU/IMF programme of support.

“The situation in the euro area is evolving rapidly. In their statement of Monday 11 July, the Eurogroup set out a range of measures to safeguard the euro area’s financial stability.

“These include enhancing the flexibility and the scope of the European Financial Stability Facility, lengthening the maturities of the loans and lowering the interest rates. These are positive developments for Ireland.

“Ireland has sufficient funding under the EU/IMF programme of support to cover all its financing requirements until the end of 2013.

“Ireland retains investment-grade status with the other main ratings agencies.”

Fears that Europe’s debt crisis is spreading sent shares falling yesterday. The ISEQ index dropped 0.5% while British stocks retreated for a third day as concern intensified that the euro area’s sovereign-debt crisis has spread to Italy.

Yesterday too the euro recovered, having fallen to a four-month low of $1.3840 earlier in the morning.