–If Budget, EU-IMF Fail To Stop Bank Outflows – Will Downgrade Again
LONDON (MNI) – If the 2011 Budget and the to-be-finalised EU-IMF
bailout fails to prevent the outflow of wholesale funding from the Irish
banking system, Ireland could be downgraded again, ratings agency
Standard & Poor’s warned today.
In a teleconference following the decision to downgrade Ireland’s
long-term soveeign credit rating to A from AA- and to put the country on
Creditwatch negative, S&P Director Sovereign Group EMEA Frank Gill
said:
“We would lower the ratings again if, for example, the EU/IMF
program and the 2011 budget, which is scheduled to be debated in the
Dail in the first part of December, if neither one of those stopped the
wholesale funding outflows from the banking system that would likely
result in a further downgrade of the ratings”.
Gill said that the fate of the Irish government’s and the banking
system’s are now “one and the same”.
Pressed on what the risk was of Ireland’s Creditwatch negative
becoming an actual downgrade, the S&P official said that historically
2/3 of Creditwatch negatives become downgrades, with the avarage time
for that process being about a month.
The official said that the key reason behind the latest downgrade
of Ireland had been the new estimates of the cost of recapitalising the
country’s banking system:
“The reason why we did this is because we have again revised
upwards our projections for the upside cost to the government of
recapitalising the very troubled Irish banking system. Our new estimates
are the minimum cost to the government of injecting capital into the
system upfront will be around E50bln or 32% of GDP”.
Jefferies International’s David Owen noted that the National
Recovery Plan published by the Irish government may have unwisely drawn
attention to a worrying aspect of the government’s funding base:
“Perhaps the most important statement in the just published 140
page National Recovery Plan 2011-2014 was on page 80 when the Department
of Finance highlighted that almost 85% of Irish bonds are held by
overseas investors. Faced with a buyers’ strike, a further spike in
yields and potentially an outflow from bank deposits this is arguably
not something that one would really wish to draw attention to”.
Irish spreads extended the widening already seen earlier today,
with 10-year spreads reaching 623bps, although this is still off the
record high of 652bps on Nov 11.
–London newsroom: 00 44 20 7862 7492; ukeditorial@marketnews.com
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