Tags: Fitch | Downgrades | ireland | debt | rating

Fitch Downgrades Ireland on Banking, Economic Woes

Wednesday, 06 Oct 2010 07:48 AM

Fitch cut Ireland's credit rating on Wednesday, citing the huge cost of cleaning up its banks as the country's regulator warned levels of soured property loans could be worse than disclosed and consumer sentiment plummeted.

The flurry of bad news, coming a day after rival rating agency Moody's said it too might downgrade Ireland, drove yield spreads on Irish debt higher, putting further pressure on a government already struggling to keep a lid on a debt crisis that threatens to spiral out of control.

As well as cutting Ireland to A-plus from AA-negative, Fitch put its rating on a negative outlook, also pointing to uncertainty over the country's wavering economic recovery.

The Irish government last week revealed that it could cost as much as 50 billion euros ($69.3 billion), or over 11,000 euros per head of a recession-weary population, to unwind years of reckless lending to developers during the "Celtic Tiger" boom.

"The 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," Fitch said in a statement on Wednesday.

"The negative outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort."

Data in recent days indicates Ireland's brief and modest economic recovery may have petered out, with surveys over the last week indicating that both its services and manufacturing sectors are back in recession.

Irish consumer sentiment plummeted in September as the enormity of the country's bank bailout and fear of more budgetary pain ahead panicked some people into pulling back on buying, a survey showed on Wednesday.

Financial regulator Matthew Elderfield told a parliamentary committee on Wednesday that Ireland's mortgage arrears figures only show part of the problem borrowers are facing.

Elderfield said 36,000 borrowers were in arrears on their mortgage, representing 4.3 percent of overall mortgages.

"(But) we know that those stats really don't show the full picture because it doesn't show the level of rescheduled loans." Elderfield also said there was widespread underprovisioning for loan losses among Ireland's credit unions.

Rival ratings agency Moody's warned on Tuesday it may cut Ireland's credit rating, saying additional austerity measures are needed to help mend public finances.

The fragility of Ireland's economic recovery and the scale of the mess at its banks have spooked lenders and it now costs Ireland almost three times as much to borrow as Germany.

The 10-year Irish/German bond yield spread widened to 425 bps from 420 bps before the Fitch downgrade while the cost of insuring Irish debt against default rose, with Irish 5-year credit default swaps at 450.8 basis points from 437.4 bps at the New York close on Tuesday.

The impact of the Fitch downgrade was felt across the euro zone, with German government bond futures hitting a session high and the cost of insuring Greek debt against default rising.

Ireland is still well short of the BBB-negative rating — one step short of junk status — that Fitch has on Greece, however.

"Ireland still retains considerable financial flexibility," the agency said of a country that has said it will not need to raise money on bond markets again this year.

"Ireland is regaining its international competitiveness lost during the 'boom' years and ...the drag on growth from the collapse of the construction boom has mostly run its course."

Elderfield also warned against inflicting losses on senior bondholders exposed to Ireland's banks, pointing out markets are already nervous about lending to the government and Irish financial institutions.

"The current difficult funding position for both the Irish government and the banking system means one should be very cautious about contemplating such a step in the present crisis," he said.

He noted that other authorities had only very rarely forced senior bondholders to absorb losses during the financial crisis but said that did not rule out the possibility of negotiating a deal with lenders.

© 2017 Thomson/Reuters. All rights reserved.

 
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Fitch cut Ireland's credit rating on Wednesday, citing the huge cost of cleaning up its banks as the country's regulator warned levels of soured property loans could be worse than disclosed and consumer sentiment plummeted. The flurry of bad news, coming a day after rival...
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2010-48-06
Wednesday, 06 Oct 2010 07:48 AM
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