Moody's downgrades Ireland, outlook stable

Monday 19th July 2010

Moody's has downgraded Ireland's sovereign bond rating by one notch to Aa2, citing weaker growth prospects and the high costs of rebuilding the country's crisis-hit banking system.

The rating agency, which cut Ireland from Aa1, said the outlook was stable.

The move, which put Moody's on par with rival agency Standard and Poor's AA rating and still one notch above Fitch, comes a day before Ireland plans to sell bonds worth between €1bn and €1.5bn at its regular monthly auction.

"Today's downgrade is primarily driven by the Irish government's gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability," Dietmar Hornung, a Moody's vice president and lead analyst for Ireland, said in a statement.

Moody's said it expects Irish economic growth to be below historical trend over the next three to five years. It said banking and real estate - engines of growth in the years preceding the country's crisis - would not contribute meaningfully to overall growth in the coming years.

The IMF recently said Dublin would not meet a European Union-agreed deadline to reduce its budget deficit to three percent of GDP by 2014, a day after a think tank forecast that bank bailouts could expand this year's budget deficit to almost 20 percent.

"The timing isn't great, given the bond auction tomorrow and certainly this will add to the premium that will need to be paid to raise money," Alan McQuaid, chief economist at Bloxham, said.

"While some it may be justified I think some of it is over the top."

The spread of Irish 10-year bonds against their German equivalent widened on Monday to 300 basis points, their highest since July 2.

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