Usually in Europe’s debt crisis, it’s been the sovereigns that have been downgraded first — and only then have their domestic banks followed.
In this, as in so much else, Irish banking just broke the mould.
This is an interesting causal chain from Standard & Poor’s on Wednesday:
Standard & Poor’s Ratings Services today said that it has lowered its long-term ratings on the Republic of Ireland to ‘A-’ from ‘A’ and its short-term ratings to ‘A-2′ from ‘A-1′. The ratings remain on CreditWatch with negative implications…
“The downgrade follows Standard & Poor’s revision of the Irish Banking Industry Country Risk Assessment (BICRA) to Group ’6′ from ’4′,” Standard & Poor’s sovereign credit analyst Frank Gill said.
The ratings remain on CreditWatch, reflecting our view of the uncertainties surrounding the size of Ireland’s additional capital needs for its largely state-owned financial sector…
Standard & Poor’s expects to resolve the CreditWatch placement by April, when we should be in a position to assess the impact of additional capital injections on the government’s debt dynamics.
S&P last downgraded Ireland in November, putting it below the threshold where banks would have to begin applying 20 per cent risk weighting to holdings of its bonds. Although they haven’t held many Irish bonds at all during the crisis, Irish banks do get an exception. As if we hadn’t had enough of all this intertwining.
The bigger question is what a bigger bank recapitalisation bill means for Ireland’s coming election, including the likely winners’ interest in getting senior bondholders to share the burden.
But for now, you’ve got to ask where the sovereign ends and the bank capitalisation machine starts. If the distinction even matters any more.
Related link:
When Irish eyes are crying – FT Alphaville