Wednesday, 13 July 2011

Irish Debt Is Junk...

Irish debt cut to 'junk' status as euro zone crisis deepens...

Irish debt was cut to “junk” status by credit rating agency Moody’s, last night, hours after the Minister for Finance said that measures to aid Greece proposed by euro zone finance ministers on Monday night would benefit Ireland.

Moody’s appeared to contradict the Minister last night saying the measures being contemplated for Greece had increased the chance that Ireland might default on some of its debts if it has to seek another bailout from Europe.

The resulting downgrade is expected to lead to a sell-off in Irish bonds when markets open today as many lenders will only hold bonds considered to be investment grade by privately owned rating agencies such as Moody’s.

Bloxham analysts said the downgrade would prompt some forced selling by investors who are not allowed to hold non-investment grade securities, and would be dropped from some of the bond indices.

“In our view this latest move by Moody’s is cynical and manipulative coming just two days before the EU/IMF in their latest quarterly review are expected to give Ireland the thumbs up in meeting all its bailout targets,” analysts wrote in a note.

“The bottom line is that the credit ratings agencies have far too much power but policymakers and regulators only have themselves to blame.”

A significant sell-off in Irish bonds will fuel the already growing anxiety that the debt crisis is spiralling out of control and spreading into major European economies.

Italian and Spanish borrowing costs hit their highest level for 14 years yesterday as euro zone leaders made plans for an emergency summit on Friday to resolve the ongoing Greek crisis, which is seen as the weakest link in the euro chain.

The proposed meeting follows the talks on Monday at which a number of proposals were discussed, most significantly the possibility that Greece would be allowed default on some of its debt. One possibility is a German debt-swap plan in which investors would be urged to exchange Greek bonds for debt whose maturity is seven years longer.

Minister for Finance Michael Noonan said yesterday that the reforms proposed on Monday would reduce the cost of Ireland’s bailout, provide scope to cut the State’s burden and ease its return to private markets.

But, citing the fresh developments in the Greek situation, Moody’s said in a statement last night there was an increasing possibility that the involvement of private investors (in effect a default) would be required as a precondition for any new aid for Ireland.

It also noted that “Ireland has shown a strong commitment to fiscal consolidation and has, to date, delivered on its programme objectives, the rating agency nevertheless notes that implementation risks remain significant, particularly in light of the continued weakness in the Irish economy”.

Speaking on RTÉ's Morning Ireland , Minister for Enterprise Richard Bruton said the downgrade would make recovery more difficult, but said Ireland had been caught up in the agency's view of the European solutions to the debt crisis.

"I think it's frustrating and it makes our job more difficult," he said.

"But I think the important thing to point out is that it doesn't reflect in any way a failure on the part of Government to meet its obligations or any downgrade in the Irish economy.

"What it reflects is uncertainty that has emerged as a result of different options that are being considered in Europe."

Goodbody economist Juliet Tennent said the reasons given for cutting the rating were in line with those cited for Portugal’s downgrade last week and “highlights the fact that the downgrades have more to do with the design and the structure of the ESM than the dynamics of the underlying economies”.

“The downgrading of Ireland’s credit rating to junk by Moody’s will further sour sentiment towards the sovereign (and indeed the euro zone) and while one would expect that the majority of ratings sensitive deposits have already left the banking system and that the majority of institutional investors are already underweight sovereign debt, it does make the road back to a self funding position for Ireland and the banks more difficult,” she wrote in a note.

While Ireland still carries investment-grade ratings with rival agencies Standard Poor’s and Fitch, the downgrade creates big new obstacle for the Government’s plan to exit the EU-IMF bailout programme and start borrowing from debt markets again next year. Only investors with a very large appetite for risk buy junk-rated bonds given the higher implied risk that the issuer may default, or fail to pay back the debt.

A spokesman for the Department of Finance said: “This is a disappointing development and it is completely at odds with the recent views of other rating agencies.”

The spokesman said it was “difficult to see” how the downgrade reflects moves to enhance the fund’s flexibility expressed by euro zone finance ministers on Monday night.

The spokesman for EU economics commissioner Olli Rehn said the commission regrets Moody’s decision. “It contrasts very much with the recent data, which support a return to GDP growth this year, and the determined implementation of the programme by the Irish government, which has taken strong ownership of it.”

Sinn Féin finance spokesman Pearse Doherty said the downgrade was a wake-up call to the Government and to Ireland's European partners.

“The Government’s failure to acknowledge that Ireland’s debt levels are unsustainable and its inaction in reducing those levels have placed us in this position," he said.

“This Government is sleepwalking Ireland into a second bailout."

The downgrade came at the end of a day on which EU internal markets commissioner, Michel Barnier, said he would propose “stiff measures” in November to curb the power of the agencies. “We were surprised that the agencies would downgrade a country without any warning,” he said, referring to a similar downgrade of Portugal last week.

But Ireland's downgrade isn't sufficient for Irish bonds to be removed from the Markit iBoxx Euro Area Sovereign Index, RBC Capital Markets said.

IBoxx uses an average rating based on a score system comprised of assessments from Moody's, Standard and Poor's and Fitch Ratings, Norbert Aul, a European rates strategist in London, said. Because it's rated higher at the other agencies, Ireland will remain above iBoxx's rating threshold.

News leaked yesterday about a summit before EU leaders agreed through diplomatic channels to meet in Brussels, putting them under pressure to calm markets by quickly agreeing a new rescue plan for Greece.

The arrangements for the meeting were not finalised last night and senior figures stressed that considerable technical work would have to be done to set up a second rescue package within three days.

Finance ministers moved late on Monday to drop their explicit pledge to ensure the effort does not lead to a “selective default” on Greek debt.

However, the European Central Bank remains steadfastly opposed on grounds that an inevitable default rating on a debt-swap deal would fan volatility in markets. Any summit on Friday would coincide with the publication of stress test results on European banks, an exercise designed to foster confidence in the effort to tackle the debt crisis.

Report - Irish Times

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