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Global Credit Research - 19 Jul 2010
Frankfurt, July 19, 2010 -- Moody's Investors Service has today downgraded Ireland's government
bond ratings to Aa2 from Aa1. The main drivers for the downgrade
1. The government's gradual but significant loss of financial
strength, as reflected by the substantial increase in the debt-to-GDP
ratio and weakening debt affordability (as represented by interest payment
to government revenue).
2. Ireland's weakened growth prospects as a result of the
severe downturn in the financial services and real estate sectors and
an ongoing contraction in private sector credit.
3. The crystallization of contingent liabilities from the banking
system, as represented by a series of recapitalization measures
and the need to create the National Asset Management Agency (NAMA),
a government-created special purpose vehicle that is acquiring
impaired loans from banks.
Moody's has changed the outlook on the ratings of the government
of Ireland to stable from negative as the rating agency now views the
upside and downside risks as being evenly balanced at the current rating
Moody's has also affirmed Ireland's short-term issuer rating
of Prime-1 with a stable outlook. Ireland falls under the
Eurozone's Aaa regional ceilings for bonds and bank deposits,
which are unaffected by the Irish government's downgrade.
Moody's has also downgraded to Aa2/stable outlook from Aa1/negative
outlook the rating of Ireland's National Asset Management Agency
(NAMA), whose debt is fully and unconditionally guaranteed by the
government of Ireland.
RATIONALE FOR DOWNGRADE
"Today's downgrade is primarily driven by the Irish government's
gradual but significant loss of financial strength, as reflected
by its deteriorating debt affordability," says Dietmar Hornung,
a Moody's Vice President -- Senior Credit Officer and lead
analyst for Ireland. The country has suffered a dramatic contraction
in GDP since 2008, causing a sharp decline in tax revenue.
The general government debt-to-GDP ratio rose from 25%
before the crisis to 64% by the end of 2009, and is continuing
Moody's also expects economic growth to be below historical trend
over the next three to five years for two reasons. Firstly,
banking and real estate -- the engines of Ireland's growth
in the years preceding the crisis -- will not contribute meaningfully
to overall growth in the coming years. Secondly, the fall
in private sector credit is dampening the growth outlook. The ongoing
credit contraction reflects both (i) the tightening in credit supply,
due to balance sheet constraints among lenders; as well as (ii) the
weak demand for credit as a consequence of a broad de-leveraging
process in which the household sector is seeking to repair its balance
sheets through increased savings (or reduced dissavings).
The third key factor driving Moody's rating action is the crystallization
of contingent liabilities from the banking system as a result of the government
taking on debt to provide support to the country's ailing banks.
Overall, the recapitalization measures announced to date could reach
almost EUR25 billion (equivalent to15.3% of Ireland's
2009 GDP) -- and Moody's expects that Anglo Irish Bank may
need further support. In addition, the government created
NAMA, a special purpose-vehicle that is acquiring loans from
participating banks at a discount in exchange for government-guaranteed
securities. While we do not expect the government -- not even
in a moderately stressed scenario -- to incur permanent losses in
excess of 25% of the country's 2009 GDP as a result of these
obligations, we believe that the uncertainty surrounding final losses
would exert additional pressure on the government's financial strength.
While Moody's expects the near-term deterioration in the
government's debt metrics to be severe, the rating agency
nevertheless expects the general government debt-to-GDP
ratio to stabilize at 95% to 100% over the next two to three
years. Given Ireland's wealthy and flexible economy and its
very high institutional strength, these debt levels are commensurate
with a Aa2 rating. Ireland's demonstrated adjustment capability
and its economic vitality -- reflected for instance in its ability
to attract foreign direct investment -- are important characteristics
that support the rating.
RATIONALE FOR STABLE OUTLOOK
At the Aa2 rating level, the upside and downside risks are evenly
balanced. "If the GDP growth trend were to exceed Moody's
expectations -- with a quick resumption of domestic credit flow and
a supportive global economic environment -- then the government's
debt metrics could stabilize earlier than is currently being assumed,"
says Mr. Hornung.
On the other hand, Moody's notes that the country could experience
downward rating pressure in the event of (i) a failure of the economy
to rebound in a meaningful way; and/or (ii) a severe deterioration
in the country's debt metrics triggered by a further crystallization
of bank contingent liabilities beyond Moody's current expectations.
For further information, please refer to Moody's Special Comment
entitled "Key Drivers of Ireland's Downgrade to Aa2," which
is available on www.moodys.com.
PREVIOUS RATING ACTION & METHODOLOGY
Moody's last rating action affecting Ireland was implemented on
2 July 2009, when the rating agency downgraded Ireland's government
bond ratings to Aa1 and assigned a negative outlook. Prior to that,
Moody's last rating action on Ireland was taken on 17 April 2009
when the rating agency placed the government bond ratings on review for
Moody's last rating action affecting NAMA was implemented on 16
June 2010, when the rating agency assigned an initial rating of
Aa1 with a negative outlook to the senior unsecured debt issued by NAMA,
which is backed by a full guarantee from the Irish government.
The principal methodology used in rating the government of Ireland and
NAMA is "Moody's Sovereign Bond Methodology", which
was published in 2008 and can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website.
MD - CCO Pub, Proj & Infra Fin
Sovereign Risk Group
Moody's Investors Service
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Ireland to Aa2, stable outlook
No Related Data.
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