Today Moody’s cut the credit rating for the Republic of Ireland a full five notches down to Baa1 from Aa2. In addition, the ratings agency placed a negative outlook on its rating for Ireland , a sign that further downgrades could follow. Dietmar Hornung, a senior credit officer at Moody’s, wrote that Moody’s "now expects Ireland’s debt ratio to increase to 120 per cent in 2013 from 66 per cent in 2009 before levelling off." The move by Moody’s saw Irish 10-year government bonds rise 7.5 basis points to 8.52. The spread to bunds is now 551 bps. After the Moody’s announcement, credit default swaps on Ireland’s debt also rose 14 basis points to 574. This is the highest level since 30 November.
Just last week, Fitch cut Ireland to the equivalent BBB+. At the time, Win Thin of Brown Brothers Harriman commented:
It’s quite unbelievable that Moody’s still has Ireland at Aa2 (equivalent to AA), though we note that last month, that agency warned of “multi-notch” downgrades to its Aa2 rating, noting that the aid plan will “crystallize more bank-contingent liabilities on the government balance sheet, and increase the Irish sovereign’s debt burden.” It noted that developments have worsened since the rating was first put on review for possible downgrade back in October. Moody’s predicted that Ireland would remain at investment grade. While we agree with that assessment now, we cannot say this will continue to hold with any certainty. While our ratings model correctly predicted significant downgrades to Western Europe as far back as mid-2009, we note that implied ratings have become a moving target as the macro backdrop for the periphery continues to deteriorate. For instance, Ireland had an implied rating of A-/A3/A- back in June. The agencies are trying to play catch-up, something we saw during the Asian crisis as well. We continue to see downgrade risks ahead for Spain, Greece, and Portugal too.
Below is BBH’s developed country risk index where Ireland is second to Greece as having the lowest implied credit rating – still one notch below this cut by Moody’s. S&P still has an A rating on Ireland. So we should expect this downgrade to come next.
