Tags: Irish Debt Downgraded After EU Sets Rescue Fund

Irish Debt Downgraded After EU Sets Rescue Fund

Friday, 17 Dec 2010 07:19 AM

Ratings agency Moody's gave a resounding thumbs-down on Friday to Europe's efforts to resolve a rolling debt crisis, slashing Ireland's credit rating by five notches despite this month's EU/IMF bailout.

The rare steep downgrade came during a European Union summit intended to restore market confidence by creating a permanent financial safety net for the eurozone from 2013 and by vowing to do whatever it takes to preserve the single currency.

Moody's cut Ireland's rating to Baa1 with a negative outlook from Aa2 and warned further downgrades could follow if Dublin was unable to stabilize its debt situation, caused by a banking crash after a decade-long property bubble burst.

"While a downgrade had been anticipated, the severity of the downgrade is surprising," Dublin-based Glas Securities said.

News of the latest blow to confidence broke as the 27 leaders held a second day of talks on how to stop contagion spreading from Greece and Ireland to other high-deficit eurozone countries such as Portugal and Spain.

"The recent events have demonstrated that financial distress in one member state can rapidly threaten macrofinancial stability of the EU as a whole through various contagion channels," a draft final summit statement seen by Reuters said.

At their first session on Thursday, the leaders spurned calls for immediate practical steps such as increasing the size of a temporary bailout fund or allowing it to be used more flexibly to buy bonds or open credit lines before troubled countries are shut out of the credit markets.

Barclay's Capital analyst economist Fabio Fois called it "another missed opportunity to calm the markets."

German Chancellor Angela Merkel, who led opposition to those options, sought to reassure citizens and markets on Friday, declaring: "We are doing everything to make the euro secure."

Merkel said the existing EU rescue fund was sufficient, and she was impressed by reforms announced by Spain and Portugal.

On the sidelines of the summit, non-euro member Britain won support from France, Germany and other countries for a drive to freeze the common EU budget in real terms over the next decade to take account of national spending cuts.

Diplomats said Prime Minister David Cameron presented a letter to EU leaders calling for a lean budget in the bloc's next seven-year spending plan after 2013, rising only in line with inflation. Poland, set to become the biggest beneficiary of the 126.5 billion euro annual budget, voiced anger at the move.

LAST RESORT

The European Central Bank took action to bolster its firepower to fight the debt crisis by announcing on Thursday it would almost double its subscribed capital.

But analysts said this was chiefly to cover the risk of write-downs on the 72 billion euros ($95.83 billion) in eurozone sovereign bonds it has bought so far, not to step up such purchases to support governments in trouble.

ECB President Jean-Claude Trichet told reporters the central bank's governing council thought it was appropriate to make "additional provisioning" — a veiled reference to potential losses on eurozone sovereign bonds.

At Germany's insistence, the 27 leaders said the long-term crisis-resolution mechanism, to be added to the EU's governing treaty, would only be activated "if indispensable to safeguard the stability of the euro as a whole," making it a last resort.

The premium investors charge to hold Greek, Irish, Portuguese or Spanish bonds rather than benchmark 10-year German Bunds crept up in thin pre-Christmas trading, and the cost of insuring their debt against default also rose.

"European leaders failed to address the issue of debt sustainability and possible insolvency problems prior to 2013," said Carsten Brzeski, senior economist at ING Belgium.

"Debt restructuring, a common eurozone bond or an increase of the EFSF? None of these issues have been addressed. But they have to be," he said.

A French delegation source said the leaders had touched on a proposal by two veteran finance ministers for common eurozone bonds, strongly opposed by Merkel, but there was no consensus to take it forward.

The record seventh summit this year approved a two-sentence amendment to the EU treaty at Germany's behest to permit the creation of a European Stability Mechanism to handle financial crises from June 2013.

The ESM, to replace the temporary fund created in May, will be empowered to grant loans on strict conditions to member states in distress, with private sector bondholders sharing the cost of any write-downs after 2013 on a case-by-case basis.

The aim is for all 27 member states to ratify the change by end 2012. European Council President Herman Van Rompuy, chairing the summit, said no country would need to put it to a referendum, removing one potential risk. Decisions will be taken by unanimity, ensuring that EU paymaster Germany retains a veto.

Many analysts expect Greece and Ireland to have to default on their debts before then, but ECB executive board member Lorenzo Bini Smaghi dismissed such talk in a Financial Times article, saying the cure could do more harm than the disease.

The EU, together with the IMF, set up a 750 billion euro ($1 trillion) EFSF loan pool to help highly indebted eurozone states unable to finance themselves in volatile markets.

There has been a relative lull in financial market pressure in the past two weeks as investors and traders close their books ahead of the end of the year, but analysts expect turbulence to resume in 2011 as Spain and Portugal face refinancing crunches and the rating agencies clearly see no diminution of risk.

On Thursday, Moody's highlighted investor fears about the first country to receive an EU/IMF rescue by saying it was putting Greece under review for a downgrade, due to uncertainty over its ability to cut debt.

Earlier this week, Moody's put Spain's debt on review for a possible downgrade and Standard & Poor's said it may cut Belgium's debt rating next year.

© 2017 Thomson/Reuters. All rights reserved.

 
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Ratings agency Moody's gave a resounding thumbs-down on Friday to Europe's efforts to resolve a rolling debt crisis, slashing Ireland's credit rating by five notches despite this month's EU/IMF bailout. The rare steep downgrade came during a European Union summit intended...
Irish Debt Downgraded After EU Sets Rescue Fund
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2010-19-17
Friday, 17 Dec 2010 07:19 AM
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