Irish credit rating cut to junk status by Moody's

EURO ON THE BRINK:IRELAND'S CREDIT rating was downgraded to junk status last night by Moody's Investors Services, one of three such agencies which dominate the global ratings industry. The move will almost certainly lead to a further sell-off of Irish Government bonds when the market opens this morning.

Moody’s downgraded Ireland from “Baa3” to “Ba1”, which is a speculative grade rating, frequently described in market commentary as “junk”. Ireland retains its investment grade rating from the two other large ratings agencies.

Moody’s gave as its main reason for the downgrade the growing likelihood of the EU imposing losses on sovereign bondholders of weak countries.

The agency also cited the weakness of the Irish economy and the risks of contagion effects of a “disorderly debt restructuring by Greece”.

It went on to note Ireland’s rating remains well above that of Greece and “the strong commitment of the Irish Government to fiscal consolidation and structural reform”. Despite this, the agency believes that Ireland is likely to need a second EU-IMF bailout in 2013 as it will be unable to raise private investment.

Separately, and earlier in the day, speculation mounted that the European Central Bank had Italian and Spanish government bond as yields on those countries’ debt retreated from record highs reached early in the trading session.

But as the mood on European debt markets remained nervous, Irish bond yields continued to nudge upwards while equity markets came under sustained pressure during morning trade.

Tumultuous market conditions during the early part of the day gave way to a calmer mood in the afternoon on stock markets, though the Iseq still finished the day down almost half a per cent, with the FTSE tumbling more than 1 per cent.

On the Iseq, falling stocks included Greencore, which announced a deal to buy British supermarket supplier Uniq, and Ryanair, which fell following profit warning from Thomas Cook.

As European authorities discussed possible solutions to Europe’s debt crisis, the yield on 10-year Irish bonds advanced 15 basis points to 13.35 per cent, having climbed to a fresh high as 13.68 per cent earlier in the day. Two-year bond yields stabilised.

Having crossed the 6 per cent threshold for the first time, the yield on 10-year Italian bonds eased back to 5.56 per cent, down 12 basis points on the previous day, while 10-year Spanish debt ended the day 18 basis points lower at 5.85 per cent. Greek bond yields also eased.

The euro hit a four-month low against the dollar, but like European equities, the currency pared its losses in the afternoon. Against the dollar, the euro was down 0.1 per cent at $1.4021 after slumping as much as 1.4 per cent earlier in the day. EU leaders are due to hold an emergency summit later in the week after finance ministers acknowledged for the first time that some form of Greek default be put in place.

Analysts at Dublin-based stockbroking firms agreed with an assessment by Minister for Finance Michael Noonan that the Italian crisis could ultimately be beneficial for Ireland’s fiscal status because it is forcing Europe to make more immediate changes to the scope and flexibility of the European Financial Stability Facility. – (Additional reporting: Bloomberg)

Dan O’Brien analyses what next for the Euro. Only available in today’s print edition of The Irish Timesor in the e-paper