By Ian Guider and Fergal O’Brien
March 30 (Bloomberg) -- Ireland had its AAA credit rating removed by Standard & Poor’s in the fourth downgrade of a euro- region government this year as the global financial turmoil fueled borrowing costs and swelled the budget deficit.
The rating was lowered one step to AA+ with a “negative” outlook, S&P said in a statement today from London, indicating the rating company is more likely to lower the classification again than raise it or leave it unchanged. Ireland received the top rating in October 2001.
“The deterioration of Ireland’s public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government’s current plans,” Trevor Cullinan and Frank Gill, analysts at S&P in London, wrote in a report today.
Euro-region governments are increasing borrowing to bolster ailing economies and bail out banks reeling amid the fallout from the global credit crisis. S&P lowered the ratings of Spain, Portugal and Greece in January. The European Commission forecast in January that Ireland’s budget deficit may widen to 11 percent of gross domestic product this year, almost four times the European Union’s approved limit.
The cost of protecting Irish government bonds from default rose 31 basis points to 252, according to CMA DataVision prices for credit-default swaps. It reached a record 396 basis points on Feb. 17.
Emergency Budget
Credit-default swaps, conceived to protect investors from default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase signals a deterioration in the perception of credit quality.
The downgrade, which puts Ireland’s rating on the same level as Spain, Belgium, Hong Kong and New Zealand, came before Prime Minister Brian Cowen’s emergency budget on April 7. The government is seeking at least 4.5 billion euros ($5.9 billion) in savings through spending cuts and tax increases. The country is “committed to restoring order” to the public finances and aims to bring the deficit below the EU’s 3 percent ceiling by 2013, the finance ministry said in a statement from Dublin today.
“S&P has no confidence that the budgetary measures will be enough,” Ciaran O’Hagan, the Paris-based head of fixed-income strategy at Societe Generale SA, wrote in a note. The downgrade “is worse than expected and will weigh on Irish gilts and AA sovereigns generally,” he said.
Yield Spread
The difference in yield, or spread, between Irish 10-year bonds and equivalent German securities widened six basis points to 235 basis points today. Trading in Irish debt closed before the S&P statement. The spread, which soared to 284 basis points March 19, averaged 18 basis points in the past 10 years.
Ireland’s economy, which contracted last year for the first time in a quarter century, is on course to shrink 6 percent in 2009, according to a central bank forecast. The euro-region economy will contract about 2.7 percent, according to European Central Bank staff projections.
“The ratings on Ireland could be lowered again if the public finances weaken substantially further than what we currently assume,” said David Beers, managing director of the global sovereign ratings group at S&P in London. “The outlook could be revised to stable if the government embraces a fiscal strategy that contains a rise in the public debt burden in line with Ireland’s modest economic growth prospects.”
Ireland last year became the first European nation to guarantee the deposits and borrowings of its largest banks as the end of a decade-long property boom soured loans. It also nationalized Anglo Irish Bank Corp. and vowed to pump 7 billion euros into Bank of Ireland Plc and Allied Irish Banks Plc.
S&P said today that the cost of supporting the banking industry could rise to as much as 20 billion euros.
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