Moody's Investors Service cut Ireland's credit rating by five notches Friday, raising some eyebrows for its magnitude and timing, but investors said the move was not unexpected.
The hatchet that Moody's brought down on the rating, cutting it to Baa1 from Aa2, did result in selling and marked another chapter in Europe's credit crisis. But the reaction was far from the drubbing Greece suffered when it was cut to junk status on June 14.
"(Ireland) is a multi-notch downgrade, but that a multi-notch downgrade would come was clearly indicated by us so it should not come as a surprise," Dietmar Hornung, sovereign credit analyst at Moody's Investors Service in London, told Reuters.
Indeed, Moody's flagged in November that it might make a multi-notch move on Ireland's credit but that it would remain investment grade.
French President Nicolas Sarkozy said Friday he was confident in Ireland's austerity measures but called Moody's decision "surprising."
The EU is exploring new rules to control the rating agencies, including the possibility they would be required to give countries three days' advance notice on a downgrade.
Other possible EU moves include levying multimillion euro fines or even setting up a rival agency.
"If the regulators are successful in weaning the markets off the drug that ratings are, then clearly the whole business model gets called into question," said Gary Jenkins, head of fixed income at Evolution Securities.
Moody's said it may cut Ireland's rating further if it is not able to stabilize its debt situation.
Hornung said he was not aware of any singular rating movement as large as the one Moody's made.
He rejected the oft-cited criticism that ratings agencies are invariably behind the curve when they make their decisions.
"This rating action is clearly forward looking," Hornung said, referring to the incorporation of the latest debt projections and fiscal austerity plans, plus European Union and International Monetary fund help.
"We incorporate our expectations regarding bank recapitalizations and debt-to-GDP figures in the future and these estimates and projections inform our rating action."
Investors, however, are not buying Moody's explanation.
Dan Fuss, who as vice chairman of Loomis Sayles helps oversee $150 billion, told Reuters late Friday that Ireland's five-notch credit downgrade by Moody's "really lagged other agencies."
Moody's move catches up with Fitch Ratings at the BBB-plus level with a stable outlook while Standard & Poor's still has Ireland two notches higher with an A rating but on watch for a downgrade.
Ireland's 10-year government debt fell 1.287 points in price to bid 76.306, driving the yield up 23.6 basis points to 8.677 percent. The spread over benchmark German government debt widened by 28 basis points.
In June, when Greece's rating was cut, the spread over German debt widened by 76 basis points, and it has moved wider still.
"So in fact the ratings agencies are a little bit behind the curve in terms of their ratings and certainly today didn't have a profound impact on market pricing, which tells you the market fully expected a downgrade and isn't paying too much attention to the ratings agencies on this issue," said Scott Mather, portfolio manager of the PIMCO Foreign bond fund.
Ireland's Baa1 rating is now equal to those of Lithuania and Russia, and Thailand, on Moody's scale, Hornung said.
In the 10-year space, Lithuania yields 5.00 percent, Russia is at 7.597 percent and Thailand is under 4 percent.
"It wouldn't be very helpful if you were just investing based on the ratings, given the lags in ratings," said Mather, who said the fund shed its Irish debt roughly a year ago.
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