Ireland Rating Cut Two Steps by S&P as ‘Barbarians’ Gather

By Dara Doyle and Christopher Anstey
Nov. 24 (Bloomberg) -- Ireland’s debt rating was lowered two steps by Standard & Poor’s, with a negative outlook, as the government prepares to unveil a four-year deficit-cutting plan and contagion spread through the rest of the euro region.
“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement late yesterday. Putting the rating on review for downgrade reflects the risk that talks on a European Union-led rescue may fail to stanch capital flight, it said.
S&P cut Ireland’s long-term rating to A from AA- and the short-term grade to A-1 from A-1+, the statement said. The reduction leaves its long-term grade five steps above Greece, which has the highest junk, or high-risk, grade.
The downgrade risks worsening an investor exodus from Irish bonds that has sparked turmoil through the euro region as Ireland hammers out an aid package with the EU and the International Monetary Fund to rescue its banking system. The extra yield that investors demand to hold Spanish 10-year bonds over German bunds yesterday surged to a euro-era record.
Irish welfare cuts of 800 million euros ($1.1 billion) are among the steps planned to narrow the deficit to 3 percent of gross domestic product by the end of 2014, said a person familiar with the matter who declined to be identified because the plan is not yet public. The shortfall will be 12 percent of GDP this year, or 32 percent when the costs of a banking rescue are included.
Separately, Bank of Ireland Plc may end up in majority state control as the government injects more capital into the lender, two people familiar with the situation said yesterday.

Bank Capital

Ireland’s government will seek to raise the core tier 1 capital levels of its banks to between 10.5 percent and 12 percent, the people said. Dublin-based broadcaster RTE earlier reported the plan, without citing anyone.
The euro, which dropped 1.9 percent against the dollar yesterday, rose 0.3 percent to $1.34 as of 7:40 a.m. in London.
The yield on Ireland’s 10-year bond was little changed at 8.61 percent after jumping 34 basis points yesterday.
While opposition political parties back the aim of reducing the deficit to the EU’s 3 percent limit by 2014, labor unions are planning “mass mobilization” in protest at the planned cuts, with a march in Dublin on Nov. 27.
“It appears that the day of reckoning has arrived,” said David Begg, head of the Dublin-based Irish Congress of Trade Unions, the umbrella group for unions, which is organizing the demonstration. “The Barbarians are at the gates.”

Days Numbered?

Prime Minister Brian Cowen is racing to finish talks with the EU and the IMF as support for his government crumbles. His Green Party junior coalition partners said two days ago that they will quit the government next month and independent lawmakers are threatening to block the 2011 budget, the first step in the four-year plan.
“The government’s days are numbered,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “What we are likely to see in the next fortnight is growing pressures on the opposition parties to abstain on the major votes and pass the budget for the sake of political stability.”
Moody’s Investors Service said two days ago a “multi- notch” downgrade in Ireland’s credit rating was “most likely”
because the bailout would increase its debt burden. Moody’s has an Aa2 long-term rating for the government, three steps higher than S&P’s new grade. Fitch Ratings has an A+ grade, one above S&P, data compiled by Bloomberg show.

Rescue Package

An Irish finance ministry spokesman didn’t immediately respond to a call and e-mail seeking comment on S&P’s decision.
EU officials estimate that a rescue package for Ireland may amount to about 85 billion euros, according to two officials familiar with the talks.
The European Commission cited the figure as a preliminary estimate on a conference call of euro-region finance ministers on Nov. 21, said the people, who spoke on condition of anonymity because the talks were private. Of the total, 35 billion euros would be earmarked for banks and 50 billion euros to help finance the Irish government.
“With domestic demand unlikely in our view to recover until 2012, gross debt to GDP at end-2011 looks set to exceed our previous projections of 120 percent,” S&P said today.
Ireland’s GDP has contracted for three consecutive years, and Irish Central Bank Governor Patrick Honohan has declared his country’s fiscal deterioration “worse than almost any other country.”

Irish Risk

The risk premium on Ireland’s 10-year debt over German bunds, Europe’s benchmark, widened 45 basis points to 589 basis points yesterday on concern that the budget may not pass and the government will fall. The yield spread reached a record 652 basis points on Nov. 11.
Irish banks forced the government to seek the bailout after loan impairments surged following the collapse of the country’s decade-long real estate boom in 2008. That year, the government pledged to back most liabilities, including all deposits in Irish banks, a promise that led the government to inject 33 billion euros to support the lenders.
As loan losses climbed, the government put the cost of the rescue at 50 billion euros in September this year, fueling investor doubts that Ireland could afford the rescue.