Fitch cuts Ireland’s credit worthiness another notch, cites soaring debt and weak growth

By Shawn Pogatchnik, AP
Wednesday, October 6, 2010

Fitch cuts Ireland’s credit rating another notch

DUBLIN — Ratings agency Fitch cut Ireland’s credit worthiness another notch Wednesday, citing the country’s long fight to emerge from record deficits, the toughest bank-bailout effort in Europe and a lagging economy.

Fitch’s downgrade to A+ from its previous AA- rating follows a similar move earlier this week by rival agency Moody’s. However, both Moody’s and Standard & Poor’s still rate Ireland at the higher grade of AA2 and AA-, respectively.

The downgrade had an immediate negative impact on Ireland’s borrowing costs on international bond markets. The interest rate, or yield, that investors demand to buy Ireland’s 10-year bonds rose to 6.4 percent Wednesday for the first time this week.

Fitch said its downgrade and negative outlook — which places Ireland on review for a potential further downgrade — was a logical consequence of Ireland’s stunning announcements on its debt crisis last week.

Finance Minister Brian Lenihan said Ireland’s deficit this year will rise to a European record of 32 percent of GDP on the back of a bank bailout expected to total at least €45 billion ($61 billion), and potentially €5 billion more if the Irish real-estate market doesn’t stabilize.

To cope, Lenihan said Ireland in November would publish a four-year deficit-fighting plan and, the following month, unveil a 2011 budget that reduces the red ink by at least €4 billion. That blow appears certain to depress Ireland’s already deflated economy.

Ireland’s financial regulator, Matthew Elderfield, told lawmakers Wednesday he expects two nationalized banks, Anglo Irish and Irish Nationwide, to attempt to negotiate loss-sharing deals with some of their largest senior bondholders.

Lenihan has previously stressed that the government will not force senior bondholders to absorb losses at any Irish bank, because this would harm Ireland’s reputation as a safe place for investment. But Elderfield said he would use his office’s powers to compel the banks to make every legal effort to minimize their losses.

Elderfield, an American who previously oversaw financial regulation in Bermuda, said the Irish government “does not intend to impose losses on senior bondholders. However, this does not rule out the possibility of some negotiations or a liquidity management exercise agreed by consent.” He suggested this could include offers to buy back bonds at below face value.

Fitch senior analyst Chris Pryce said its downgrade of Ireland “reflects the exceptional and greater-than-expected fiscal cost associated with the government’s recapitalization of the Irish banks, especially Anglo Irish Bank. The negative outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort.”

But Fitch said Ireland has enough cash stockpiled — more than €34 billion, including its national pension reserves — and borrowing capacity to ride through the crisis, with full funding for government spending already secured through mid-2011.

It noted that, excluding the exceptional bank-bailout costs this year, Ireland’s 2010 deficit is projected to reach 11.9 percent, “a more appropriate measure of the underlying fiscal position.”

But the recent worsening of Irish finances has spooked many consumers, raising doubts about the country’s ability to claw its way out of a 2-year recession. The latest consumer-confidence data published Wednesday recorded the sharpest fall in 4 1/2 years.

The survey, compiled by the Irish think tank ESRI and the bank KBC Ireland, showed the consumer-sentiment index slipping to 52.4, a 9-point drop from the previous month. Consumers’ expectations of future prospects fell even more sharply to 37.9, versus August’s level of 52.1.

“The real risk highlighted by these numbers is that Irish consumers and businesses pull back from spending and prompt a further downleg in activity. There is now an acute awareness among consumers that more pain is coming,” said Austin Hughes, chief economist at KCB Ireland.

“The key task for government is to convince consumers that the upcoming adjustment is manageable,” he said, “in the sense of both curing the public finances and not killing the Irish economy.”

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