Ireland Cut By Moody’s to One Notch Above Junk
Moody’s, the rating agency, has cut the credit rating for the Republic of Ireland two notches from Baa1 to Baa3, which is the lowest investment grade rating. They also left the outlook for further rate cuts as negative, meaning that more downgrades are expected.
The biggest news in the Euro zone periphery comes from Greece, where S&P indicated it expected 50-70% haircuts on Greek sovereign debt. But Ireland has also been in the headlines. The government started action on subordinated bank debt as the Irish high court gave authorisation for subordinated debt holders to receive haircuts. What Irish taxpayers would like to see is the bond holders sharing in the losses from the nationalised Irish banks instead of the full burden falling on taxpayers. Subordinated debt could lose up to 80% of its value in such a deal. The Allied Irish haircuts could be a template for bank debt in other Irish banks and in Spain.
The bank debt deal looks to relieve pressure on the Irish government’s debt. Clearly, the ratings agencies are still feeling behind the curve and are reactive. But Ireland’s growth prospects are limited. Inflation in the Eurozone came in at 2.7% this morning and this is well above the EC’s target rate. It suggests that more interest rate hikes are to come and this will be negative for Irish growth and for its property market.
If Irish subordinated debt can face 80% losses how on earth can it still not be regarded as junk. The ratings agencies are still way behind the curve. As soon as a default happens then the lower the cost of the bail out as many will try and redeem their loans to Ireland, effectively increasing the cost to the tax payer.
It’s the bank sub debt so I would contend this is a net positive and increases the chance that Ireland can break out of the deflationary grip that its government has imposed.
It would be even more positive if they had been able to dump responsibility for the senior debtr as well.
If Irish subordinated debt can face 80% losses how on earth can it still not be regarded as junk. The ratings agencies are still way behind the curve. As soon as a default happens then the lower the cost of the bail out as many will try and redeem their loans to Ireland, effectively increasing the cost to the tax payer.
It’s the bank sub debt so I would contend this is a net positive and increases the chance that Ireland can break out of the deflationary grip that its government has imposed.
It would be even more positive if they had been able to dump responsibility for the senior debt as well.