Moody’s warns it may cut Ireland’s debt rating amid worries over financial health, growth

By Pan Pylas, AP
Tuesday, October 5, 2010

Moody’s warns it may downgrade Ireland’s debt

LONDON — A leading credit rating agency warned Tuesday that it may cut Ireland’s government debt rating amid mounting worries over the country’s economic outlook following another bailout of the banking sector last week.

Moody’s Investor Services said it has put the country’s Aa2 rating on review for possible downgrade but that any reduction would likely only be by one notch. That means Ireland will still likely retain an A rating after the review, which could be important in preventing borrowing costs rising too high.

Moody’s says its review has been prompted by uncertainty over Ireland’s financial strength following last week’s effective nationalization of Anglo Irish Bank and other financial rescue packages, which are predicted to increase the budget deficit to a staggering 32 percent of national income this year.

The agency also said it is worried over the strength of domestic demand as a result of the severe downturn in the financial services and real estate sectors as well as an ongoing contraction in private sector credit. Higher borrowing costs in the bond markets since July, when Moody’s last cut Ireland’s rating, also make the servicing of debt more expensive.

“Ireland’s ability to preserve government financial strength faces increased uncertainty as a result of three main drivers, which together would further increase its debt and aggravate its debt affordability,” said Dietmar Hornung, Moody’s main Ireland analyst.

Hornung said the review will focus on Ireland’s ability to preserve government financial strength in a difficult economic environment, in particular the government’s revised four-year fiscal plan, due in early November —the new spending cuts and tax rises are intended to bring the budget deficit below 3 percent of gross domestic product by 2014.

The review process is expected to be concluded within three months.

Moody’s also said that it could downgrade the Aa2 rating of Ireland’s National Asset Management Agency (NAMA), whose debt is fully and unconditionally guaranteed by the government of Ireland.

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