Ireland Loses AAA Rating at S&P on Deficit, Slump

[Beet]

By Ian Guider and Fergal O’Brien

March 30 (Bloomberg) -- Ireland had its AAA credit rating removed by Standard & Poor’s in the fourth downgrade of a euro- region government this year as the global financial turmoil fueled borrowing costs and swelled the budget deficit.

The rating was lowered one step to AA+ with a “negative” outlook, S&P said in a statement today from London, indicating the rating company is more likely to lower the classification again than raise it or leave it unchanged. Ireland received the top rating in October 2001.

“The deterioration of Ireland’s public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government’s current plans,” Trevor Cullinan and Frank Gill, analysts at S&P in London, wrote in a report today.

Euro-region governments are increasing borrowing to bolster ailing economies and bail out banks reeling amid the fallout from the global credit crisis. S&P lowered the ratings of Spain, Portugal and Greece in January. The European Commission forecast in January that Ireland’s budget deficit may widen to 11 percent of gross domestic product this year, almost four times the European Union’s approved limit.

The cost of protecting Irish government bonds from default rose 31 basis points to 252, according to CMA DataVision prices for credit-default swaps. It reached a record 396 basis points on Feb. 17.

Emergency Budget

Credit-default swaps, conceived to protect investors from default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase signals a deterioration in the perception of credit quality.

The downgrade, which puts Ireland’s rating on the same level as Spain, Belgium, Hong Kong and New Zealand, came before Prime Minister Brian Cowen’s emergency budget on April 7. The government is seeking at least 4.5 billion euros ($5.9 billion) in savings through spending cuts and tax increases. The country is “committed to restoring order” to the public finances and aims to bring the deficit below the EU’s 3 percent ceiling by 2013, the finance ministry said in a statement from Dublin today.

“S&P has no confidence that the budgetary measures will be enough,” Ciaran O’Hagan, the Paris-based head of fixed-income strategy at Societe Generale SA, wrote in a note. The downgrade “is worse than expected and will weigh on Irish gilts and AA sovereigns generally,” he said.

Yield Spread

The difference in yield, or spread, between Irish 10-year bonds and equivalent German securities widened six basis points to 235 basis points today. Trading in Irish debt closed before the S&P statement. The spread, which soared to 284 basis points March 19, averaged 18 basis points in the past 10 years.

Ireland’s economy, which contracted last year for the first time in a quarter century, is on course to shrink 6 percent in 2009, according to a central bank forecast. The euro-region economy will contract about 2.7 percent, according to European Central Bank staff projections.

“The ratings on Ireland could be lowered again if the public finances weaken substantially further than what we currently assume,” said David Beers, managing director of the global sovereign ratings group at S&P in London. “The outlook could be revised to stable if the government embraces a fiscal strategy that contains a rise in the public debt burden in line with Ireland’s modest economic growth prospects.”

Ireland last year became the first European nation to guarantee the deposits and borrowings of its largest banks as the end of a decade-long property boom soured loans. It also nationalized Anglo Irish Bank Corp. and vowed to pump 7 billion euros into Bank of Ireland Plc and Allied Irish Banks Plc.

S&P said today that the cost of supporting the banking industry could rise to as much as 20 billion euros.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a69.9_yL6P.w&refer=home

[Purple State]

This was clearly on its way for a while. Ireland has been smashed by the current crisis, as it was basically held up by home prices and investment. It is a stronger Iceland, so it stayed afloat, but just barely.

[Tetro Kornbluth]

Not News.

[I spent the winter writing songs about getting better]

Epic fail joke of a country.

[patrick1]

Epic fail joke of a country.

ITT: BRTD trolls but only demonstrates that he is parochial.   

[Јas]

This was clearly on its way for a while.

Agree.

It is a stronger Iceland, so it stayed afloat, but just barely.

Disagree. Please explain.

[Purple State]

This was clearly on its way for a while.

Agree.

It is a stronger Iceland, so it stayed afloat, but just barely.

Disagree. Please explain.

Ireland and Iceland were basically propped up on the same things. They are small, investment oriented, etc. Iceland went bankrupt, Ireland didn't. So I take it as Ireland was in a stronger position than Iceland to weather this kind of storm. Although not by much which is why they are looking at continued credit rating downgrades.

[Јas]

This was clearly on its way for a while.

Agree.

It is a stronger Iceland, so it stayed afloat, but just barely.

Disagree. Please explain.

Ireland and Iceland were basically propped up on the same things. They are small, investment oriented, etc. Iceland went bankrupt, Ireland didn't. So I take it as Ireland was in a stronger position than Iceland to weather this kind of storm. Although not by much which is why they are looking at continued credit rating downgrades.

Thanks for repeating yourself.
I find the comparison to be a rather tenuous one myself.

Kaupthing, Landesbank and Glitnir together went down for around 900% of Icelandic GDP, at a time when the Icelandic Government had already for many months been fighting a difficult battle defending the depreciating krona in a time of rapidly increasing inflation (in the high teens for the latter half of last year), forcing interest rates higher still.

Ireland has serious economic problems, certainly. But in the worst case scenario - if all Irish banks went down (doubtful, but possible), we'd be facing debts more in the region of 330% of GDP. The banks have been far from whiter than white - but their exposure isn't in the same league as their Icelandic counterparts. (Our debt, though rising quickly atm, is still one of the lowest debt/GDP ratios in Europe.) Though the rates of interest are rising, there haven't been any serious signs yet that we will lose our current levels of access to credit in the short-term.

We also crucially don't have a currency to defend or rampant inflation to worry about. In the absence of eurozone membership, we'd be in the open water. However, thankfully the view is a lot better from within the eurozone than without. Interest rates are negligible. Inflation is near 0. The euro is stable.

If our banks manage to muddle through, then though we face a serious recession for a few years, we'll be fine. Ireland may indeed eventually default (I think it's unlikely, but I'll grant it is a possibility) but we aren't comparable to Iceland, IMO. We're more comparable with Spain, Greece and Italy (who share similar credit ratings). Collapse is a possibility, but I'd suggest improbable. Iceland's economy was just a hedgefund that went wrong. It doesn't compare.

[Beet]

Part of Iceland's problem was that it had a lot of foreign denominated debt compared to probably domestically denominated assets/earnings potential and this resulted in a currency mismatch on their banks' balance sheets when the currency depreciated, which is the same problem as in any classical currency crisis.

'Almost 68% of lending to corporates at the end of September, prior to the banks' collapse, was foreign-denominated, up from 59% at the beginning of 2008. The high proportion of foreign debt resulted from large-scale investment abroad, financed by foreign borrowing. Unfavourable exchange rate developments aggravated the situation, as the ISK trade-weighted index (reflecting a weighted average of trading partner currencies) rose by 59% during the first 9M of 2008.'

On the other hand, I would venture to guess Iceland will be one of the first countries to emerge from the crisis.

[Swing low, sweet chariot. Comin' for to carry me home.]

I don't understand the downgrade.   is the debt owed in another currency?  if owed in its own currency, there is ZERO chance of a default.

[Beet]

I don't understand the downgrade.   is the debt owed in another currency?  if owed in its own currency, there is ZERO chance of a default.

Ireland is on the euro, which means it cannot make unilateral monetary decisions (unless it goes off and devalues). Keep in mind also that a politicial decision can be made to default, or force a default (in Brussels or Dublin) and that is where the risk lies.

[Swing low, sweet chariot. Comin' for to carry me home.]

I don't understand the downgrade.   is the debt owed in another currency?  if owed in its own currency, there is ZERO chance of a default.

Ireland is on the euro, which means it cannot make unilateral monetary decisions (unless it goes off and devalues).

I don't understand.

they are either on the euro (can not devalue - can not print ) or they are not (can devalue - can print)

---

Keep in mind also that a politicial decision can be made to default, or force a default (in Brussels or Dublin) and that is where the risk lies.

unless you have a big brother, defaulting is a horrible choice.  But if the debt is owed in your own currency, printing is a much better choice than defaulting.  And at a time when many in the world are printing, why not print?

[Gustaf]

Devaluing the currency is the same to the lender. It still means that you don't get your money back.

Jas, having incorrect interest rates and incorrect exchange rates is not necessarily a good thing. Not having sails doesn't really make a boat more stable.

[I spent the winter writing songs about getting better]

None of this would be happening if the United Kingdom of Great Britain and Ireland existed, which it should've.

[2952-0-0]

if owed in its own currency, there is ZERO chance of a default.

Don't be so sure. In 1998 Russia defaulted on Ruble debt but not Dollar debt.

None of this would be happening if the United Kingdom of Great Britain and Ireland existed, which it should've.

In case you haven't realized, the bankers have joked that the City of London is Reykjavik On the Thames.

[patrick1]

None of this would be happening if the United Kingdom of Great Britain and Ireland existed, which it should've.

It did exist for 120 years. nice try though.

[I spent the winter writing songs about getting better]

Yeah I meant it should still exist.

[patrick1]

Yeah because 1801-1921 were a golden age for Ireland.  The famine, mass poverty and emigration.  A population crash.  Good times. 

[Јas]

Jas, having incorrect interest rates and incorrect exchange rates is not necessarily a good thing.

True, low eurozone interest rates spurred on our property boom and the strength of the euro against sterling is hurting our export competitiveness now (hence the focus on wage cuts in the absence of any possible devluation here).

However, the consensus among economists here is that eurozone membership has protected us from speculative currency attacks which we couldn't have adequately defended. I tend to agree.

[Tetro Kornbluth]

None of this would be happening if the United Kingdom of Great Britain and Ireland existed, which it should've.

STFU please, or at least, learn what you are talking about first.

[k-onmmunist]

None of this would be happening if the United Kingdom of Great Britain and Ireland existed, which it should've.

Agreed.

[Јas]

The Government set out its emergency budget yesterday.
More taxes, less expenditure and Europe's first 'bad bank' scheme.

On the Budget: Irish Times, BBC
On the Bad Bank Scheme: Financial Times

[TeePee4Prez]

Yeah because 1801-1921 were a golden age for Ireland.  The famine, mass poverty and emigration.  A population crash.  Good times. 

Haven't heard from you in a while.  But yeah, Ireland seems to be the issue I frequently cross party lines on in this Forum for some reason.  Forgot to mention the loading food onto ships and dumping it out at sea.  There's a lot high school textbooks don't teach you about the "Famine".  (Notice the quote marks)

[Tetro Kornbluth]

Yeah because 1801-1921 were a golden age for Ireland.  The famine, mass poverty and emigration.  A population crash.  Good times. 

Haven't heard from you in a while.  But yeah, Ireland seems to be the issue I frequently cross party lines on in this Forum for some reason.  Forgot to mention the loading food onto ships and dumping it out at sea.  There's a lot high school textbooks don't teach you about the "Famine".  (Notice the quote marks)

STFU please, or at least, learn what you are talking about first.

[TeePee4Prez]

Yeah because 1801-1921 were a golden age for Ireland.  The famine, mass poverty and emigration.  A population crash.  Good times. 

Haven't heard from you in a while.  But yeah, Ireland seems to be the issue I frequently cross party lines on in this Forum for some reason.  Forgot to mention the loading food onto ships and dumping it out at sea.  There's a lot high school textbooks don't teach you about the "Famine".  (Notice the quote marks)

STFU please, or at least, learn what you are talking about first.

Are you an Orangeman?  I know your avatar could possibly suggest that.