Ireland stung by S&P cut, pressure grows over banks

Reuters | Aug 25, 2010 | 7:16pm IST

Ireland’s government faced mounting pressure on Wednesday after a credit rating cut from Standard & Poor’s pushed its borrowing costs higher. After winning plaudits for moving quickly to tackle its deficit, Ireland is once again at the center of European debt fears with investors demanding a whopping 346 basis point premium to hold Irish 10-year debt over German Bunds, the highest level since the Greek financial crisis gripped in May. S&P cut Ireland’s long-term rating by one notch to ‘AA-‘ on fears of a substantially higher bill for supporting the banking sector and assigned a negative outlook, meaning another cut is likely over the next one or two years. Markets want Ireland to put a final price on purging its banks of a decade-long property binge but the head of Ireland’s debt management agency said that was impossible before the year-end.

“It’s a bit like waking up the patient in the middle of an operation to tell him he’s not feeling well,” John Corrigan, the chief executive of the National Treasury Management Agency (NTMA) told Reuters Insider television. “We know the situation is pretty painful but we have to get to the end of the operation which will be in December.” S&P hiked its estimate of the cost to the government of recapitalising the banks at 45-50 billion euros ($63 billion), a figure dismissed by the debt agency in highly unusual criticism. Corrigan described S&P’s analysis as “flawed”. Fellow euro-zone peripheral Portugal managed to raise 1.3 billion euros in bonds on Wednesday but demand was below Ireland’s auction last week and the cost of protecting Irish and Portuguese debt against default rose. Rating agencies have been steadily hacking away at Ireland’s credit rating and S&P’s is now on a par with Fitch and one notch below Moody’s, which cut its rating to Aa2 last month. Both Fitch and Moody’s have stable outlooks.


Prime Minister Brian Cowen has been lauded for tackling the worst state deficit in Europe but a steadily rising bill for bailing out nationalised lender Anglo Irish Bank — from 4.5 billion euros last year to an estimated 22-25 billion at present — threatens to eclipse his fiscal achievements. The extra top-ups for Anglo Irish Bank and two building societies will likely push the country’s budget deficit over 20 pecent of GDP this year from 14 percent in 2009. Mrket fears mean that Cowen will be under even more pressure to shrink the underlying budget in the face of an already stretched and unhappy electorate and tensions within his own party and the wider coalition. Cowen is broadly expected to push through his fourth austerity budget this December because no party wants elections. A European Commission decision on Anglo’s restructuring plan, some details of Allied Irish Bank’s capital-raising asset sales, the Irish banks’ refinancing of around 25 billion euros in redemptions and a possible Bank of Ireland public bond are all expected in September.


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