LONDON (MNI) Late Tuesday, rating agency Standard and Poors cut
Ireland’s long-term sovereign rating by two notches from “AA-” to “A”.
The full text of S&P’s statement follows:-

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LONDON (Standard & Poor’s) Nov. 23, 2010–Standard & Poor’s Ratings
Services said today that it lowered its long-term sovereign credit
rating on the Republic of Ireland to ‘A’ from ‘AA-‘ and its short-term
rating to ‘A-1′ from ‘A-1+’. At the same time, Standard & Poor’s said
that it placed both the short- and long-term ratings on CreditWatch with
negative implications. The transfer and convertibility assessment
remains ‘AAA’, as it is for all members of the European Economic and
Monetary Union.

The downgrade to ‘A’ and the CreditWatch action applies to other
ratings that depend on Ireland’s sovereign credit rating, including the
issuer credit rating on the National Asset Management Agency (NAMA), and
the senior unsecured debt ratings on government-guaranteed securities of
Irish banks.

“The lower ratings reflect our view that the Irish government will
have to shoulder additional costs associated with further capital
injections into Ireland’s troubled banking system,” explained Standard &
Poor’s credit analyst Frank Gill. “We expect the government to be given
access to a joint loan program extended by the EU and the International
Monetary Fund (IMF).” Were it not for this support, the sovereign rating
would be under even greater pressure due to our view of the liquidity
challenges posed by Ireland’s banking system. At over three times GDP,
Ireland’s stock of domestic credit is among the highest in the eurozone,
and will likely weigh on the timing and trajectory of a recovery of
domestic demand over the medium term. “We think it reasonable to expect
that the EU-IMF program currently being negotiated should help Ireland
manage its downsizing of the commercial banks’ balance sheets,” Mr. Gill
added. However, accelerated asset disposal could in our view hasten the
need for additional capital requirements as some assets could be
liquidated at prices below carrying values.” Depending upon the extent
to which contingent liabilities become current, public debt could rise
still further. Under its Eligible Liabilities Guarantee Scheme, the
Irish government guarantees banking institutions’ deposits and senior
debt equivalent to 75% of GDP and 20% of GDP respectively. These
guarantees are in addition to those extended under the government’s
Deposit Guarantee Scheme.

While a multiyear external support program may instill greater
market confidence in the ability of Irish banks to rollover external
debt, it will not reduce levels of private and public debt. Indeed, with
domestic demand unlikely in our view to recover until 2012, net general
government debt to GDP at end 2012 looks set to exceed our previous
projections of 113% of GDP. This is more than 1.5x the median for the
average of eurozone sovereigns, and well above the debt burdens we
project for eurozone sovereigns such as the Kingdom of Belgium (98%;
AA+/Stable/A-1+) and the Kingdom of Spain (65%; AA/Negative/A-1+). Irish
private external debt levels also remain among the highest in the
eurozone. At the end of 2009, these reached 325% of GDP, excluding
Ireland’s international financial services sector.

Our gross general government debt figure for Ireland includes NAMA
issuance to date, as well as a 6.5% of GDP estimate of new borrowings to
create additional capital buffers for Ireland’s financial system. Under
Standard & Poor’s methodology, only highly liquid arms-length assets are
netted out of gross general government debt assets. As a result, we do
not net out NAMA’s distressed property assets when assessing net debt
levels in Ireland, although we acknowledge that future recoveries should
provide supplemental funding for the government’s borrowing needs. In
addition, Irish government liquid assets appear substantial, consisting
of 16% of GDP in government deposits and the 8% of GDP portion of the
national pension fund that is not already invested in strategic
commercial banking stakes. “The outlook for future costs to the
government from financial retrenchment remains uncertain,” Mr. Gill
said. “In our view, Ireland’s banking system will take several years to
downsize.” Until then, the banking system is unlikely to be in a
position to support the country’s economic growth. As a consequence of
the high overhang of private debt, fiscal austerity, and the uneven
outlook for external demand in Europe, Standard & Poor’s now expects
close to zero nominal GDP growth for 2011 and 2012. We do not envisage
GDP exceeding 2% a year in real terms before 2013.

In our view, downside risks of deflation remain. These depend
partly on the external environment and the speed with which the
financial sector can recover sufficiently to contribute to the economy
again. Meanwhile, uncertainties surrounding the timing and extent of
imposed burden sharing by EU institutions have raised refinancing costs.
In our opinion, these refinancing costs are likely to remain high until
investors perceive the forecasts for primary fiscal balances as much
improved.

Our baseline expectation is that Ireland’s general government
budgetary position improves by EUR15 billion (just under 10% of GDP)
over 2011-2014 exclusive of any additional capital needs of the banking
system. Nevertheless, reform fatigue could set in should the global
economic environment weigh on the pace of the recovery.

The CreditWatch placement reflects the possibility of another
downgrade if the negotiations over the terms of the IMF-EU program or
over Ireland’s 2011 budget fail to staunch wholesale funding outflows.
The ratings could also come under renewed pressure in the short term
should the domestic policy consensus weaken, jeopardizing the successful
implementation of a multiyear adjustment program. The emergence of a
European sovereign debt restructuring framework that could reduce the
perceived adverse political and financial cost of a sovereign debt
restructuring could also lead us to reconsider our view of Ireland’s
creditworthiness. However, we expect that resolution of this CreditWatch
listing will likely leave the government’s ratings in an
investment-grade category.

Conversely, the ratings could be removed from CreditWatch if the
conclusion of the program and passage of the budget eases external
pressure. Standard & Poor’s expects to resolve its CreditWatch placement
by early in the first quarter of 2011.

— London newsroom: 00 44 20 7862 7499; e-ml: ukeditorial@marketnews.com

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