More signs of a slumping global economy. How long can we go without loosing our AAA rating? If we do, it is over…
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Fitch Downgrades Ireland’s Rating on Cost of Banking Bailout
Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction.
Ireland was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the nation’s bailout of its banking system, Fitch said in a statement today.
The move comes a day after Moody’s Investors Service said it may cut the country’s rating. Ireland may have to spend as much as 50 billion euros ($69 billion) to repair its financial system, pushing the budget deficit this year to 32 percent of gross domestic product. Fitch said the rating could be lowered again if the economy stagnates and political support for budgetary consolidation weakens.
“Ireland is at the lowest point, it shouldn’t get any worse,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said in a phone interview. “We’re not funding at the moment. We’re in a comfortable situation.”
Ireland’s government last month canceled bond auctions in October and November, saying the state is fully funded through the first half of 2011. Ireland has an Aa2 rating at Moody’s and AA- at Standard & Poor’s.
‘Last Resort’
The yield spread between Irish 10-year bonds and those of Germany, Europe’s benchmark, widened to a record last month on concern that Ireland would become the first nation after Greece to tap the 750 billion-euro rescue fund set up in May by the European Union and International Monetary fund.
Christopher Pryce, a director at Fitch in London, said a bailout would be a “last resort” for Ireland’s government. The government is “determined” to avoid the need for aid, as it may be conditional on the country raising its corporation tax rate of 12.5 percent, he said by phone.
The euro fell 0.3 percent against the dollar after the rating cut, dropping to as low as $1.3799. It traded at $1.3863 as of 1:15 p.m. in London.
Irish bonds pared their advance and the spread with German bunds widened to 422 basis points from 410 basis points yesterday. It reached a record 454 basis points on Sept. 29. Credit-default swaps linked to Irish government debt rose 9 basis points to 446, according to data provider CMA.
Growth Risks
Ireland has injected about 33 billion euros into banks and building societies, including 22.9 billion euros into Anglo Irish Bank Corp. Anglo Irish may need up to an additional 6.4 billion euros of capital and a further 5 billion euros in the event of unexpected losses. Irish Nationwide Building Society may need a further 2.7 billion euros.
Fitch said the “timing and strength” of the recovery is critical to reducing the budget deficit. While the economy is rebalancing, “ongoing distress” in real-estate markets and uncertainty over the global economic outlook “weigh on growth prospects and fiscal outlook,” it said.
Irish consumer confidence plunged the most in more than four years last month due to the mounting burden of bailing out Anglo Irish and the surge in sovereign borrowing costs.
“Ireland has experienced a great panic,” said Austin Hughes, chief economist at KBC Ireland. There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.”
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