Oh dear. Standard & Poor’s on Tuesday night downgraded Ireland’s sovereign rating by one notch to AA-.
The rating agency said its outlook for the country was negative, noting the cost of supporting the ailing Irish banking sector would “further weaken [Ireland's] financial flexibility.”
(As a reminder, S&P stripped Ireland of its triple-A rating back in March 2009, and there’s been a steady drumbeat of downgrades since)
Markit’s Otis Casey noted the downgrade was “in some ways a confirmation of what the [CDS] market has already seen,” given recent widening of the country’s credit default swaps.
“Ireland CDS was at 310 bps (+15) in late London trading today. There may be a market impact to the downgrade at London open,” Casey added.
Here’s more from the S&P statement:
The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility over the medium term. In light of the recent announcement of new capital injections into Anglo Irish Bank Corp. Ltd. (BBB/Watch Neg/A-2), our updated projections suggest that Ireland’s net general government debt will rise toward 113% of GDP in 2012. This is more than 1.5x the median for the average of eurozone sovereigns, and well above the debt burdens we project for similarly rated eurozone sovereigns such as Belgium (98%; Kingdom of; AA+/Stable/A-1+) and Spain (65%; Kingdom of; AA/Negative/A-1+).
After a decade of rapid credit growth, which in our view greatly increased the risk profile of Irish banks, the Irish government has adopted what we view as a proactive and transparent approach to dealing with the financial sector’s difficulties. We believe this should help foster a gradual recovery of the Irish economy over the medium term. Nonetheless, we believe that the government’s support of the banking sector represents a substantial and increasing fiscal burden, which in our view will be slow to unwind.
Related links:
When Irish spreads are widening – FT Alphaville
Those increasing Irish haircuts… – FT Alphaville