Richard Wray, Thursday 26 August 2010 

Ireland’s national debt management agency has hit back at the decision of Standard & Poor’s (S&P) to downgrade the country’s ratings on concerns about the high cost of bailing out its ailing banking sector.The National Treasury Management Agency (NTMA), which is responsible for raising cash for the country, described the assumptions on which S&P had based its decision as “flawed”.

“In terms of the specific analysis by S&P, this is largely predicated upon an extreme estimate of bank recapitalisation costs of up to €50bn,” the NTMA said. “We believe this approach is flawed.”Late last night, S&P announced that it had cut Ireland’s long-term rating by one notch to “AA-“, the fourth highest investment grade, and assigned the country a negative outlook due to the rising cost of supporting the country’s banks. S&P reckons the cumulative total cost to the government of providing support to the banking sector has increased to €90bn (£73bn) from about €80bn as the specific cost of recapitalising the banks has risen to as much as €50bn from its original forecast of €35bn.

News of the downgrade saw the price of Irish bonds slump, while German bunds – seen as a far safer haven for investors – gained ground. As a result, the yield spread between the two widened to a record level of 330 basis points, smashing through the levels reached earlier in the year when the EU and International Monetary Fund (IMF) announced their mammoth eurozone rescue plan to deal with the burgeoning sovereign debt crisis on the continent.

Ireland is rapidly being seen by economists as the second riskiest country in the eurozone after Greece. S&P’s rating for the country is now the same as that of rival Fitch, and one notch below Moody’s, which cut its rating to Aa2 last month.“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,” said S&P’s credit analyst Trevor Cullinan in a statement last night.

The move comes after the recent announcement of new capital injections into Anglo Irish Bank. S&P now reckons Ireland’s net general government debt will rise toward 113% of GDP in 2012, more than 1.5 times the median for the average of eurozone nations, and well above the debt burdens it projects for similarly rated eurozone sovereigns such as Belgium – at 98% – and Spain, at 65%.

A further downgrade is possible, S&P warned, if the fiscal cost of supporting the banking sector rises further, “or if other adverse economic developments weaken the government’s ability to meet its medium-term fiscal objectives”.

Source:Guardian.co.uk