Credit rating agencies often downgrade debt after some disaster. That is certainly the case with Ireland, which appears to have gotten a rescue package from the EU and IMF in exchange for a three-year $20.5 billion deficit reduction plan.
Standard & Poor’s Ratings Services is lowering 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+’.
The lower ratings reflect our view that the Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system.
S&P also put the debt on negative Credit Watch because it believes the nation will not begin much of an economic improvement until 2012. The credit rating operation also said it feared the rescue package about to go into place will not be adequate if the Irish balance sheet continues to worsen.
Most, if not all, capital markets investors saw the trouble on its way weeks if not months ago. It became clear that Ireland was likely to be the next victim of contagion as its bonds came under siege. Ireland said it had money to finance itself through the middle of next year. That message was drowned out by word that the nation’s bank system was near collapse and that Ireland would need to make billions of dollars of investments to save it. That was exacerbated by a deteriorating real estate market and a threat that higher corporate taxes would push multinational companies to move their business elsewhere.
The spreads on Irish bonds have already skyrocketed and may have reached highs due to the impending rescue. S&P did not do any of its clients a favor to point that out long after it had become obvious.
Douglas A. McIntyre
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