PARIS — Ireland’s efforts to pull out of a deep economic slump suffered a setback Monday when a major credit agency downgraded the country’s bond rating, citing a weak banking system and rising debt.
Moody’s Investors Service downgraded Ireland one notch, to Aa2 from Aa1, although it remains comfortably above junk level. Moody’s also changed the outlook on the ratings to stable from negative.
“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,” said Dietmar Hornung, a senior credit officer at Moody’s.
The agency also said that the downgrade had been driven by the increased burden in liability for banks after a series of recapitalization measures led by the state.
Yields on the benchmark 10-year Irish bond rose 0.04 percentage point — a moderation from the initial gain — in reaction.
Gerard Fitzpatrick, fixed income portfolio manager at Russell Investments in London, said “relatively modest” market reaction to the downgrade — and one last week for Portugal — “indicates that the market has largely priced in the negative factors driving these downgrades.”
“This is especially true given the austerity measures in place which in the long term aim at limiting debt to G.D.P. ratios,” he added.
A test of investor confidence in the government will come Tuesday when Ireland plans to sell €1 billion to €1.5 billion, or $2 billion, worth of bonds maturing in 2016 and 2020.
In a sense the near-term pressure is off Dublin. The government does not face any redemptions of benchmark bonds this year and it has raised sufficient money to last until the first quarter of 2011 — regardless of the outcome of coming sales, according to analysts.
Recent bond sales by other European governments under pressure, like Spain and Portugal, have been stronger than some analysts had expected, given the size of their deficits.
Elsewhere in Europe, markets were stable Monday, with most stock indexes down slightly. The euro was quoted in London at $1.2973, up from $1.2930 late Friday.
Once one of the fastest-growing economies in Europe, Ireland has suffered a dramatic turnaround in recent years as the removal of easy credit and a crash in home prices hurt consumer confidence.
The economy shrank 7.1 percent last year, causing a steep decline in tax revenue. The ratio of debt to G.D.P. rose to 64 percent by the end of 2009, from 25 percent before the crisis, and is continuing to grow. Moody’s predicted it would stabilize at 95 percent to 100 percent over the next two to three years.
The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of G.D.P. last year — worse than the deficit in Greece. It continues to deteriorate.
Joblessness in the country of 4.5 million is now above 13 percent.
In response to the rising deficit, Irish politicians have raised taxes and cut salaries for nurses, professors and other public workers by as much as 20 percent. They have also thrown money into the country’s main lenders to prevent bank failures.
Moody’s said that the recapitalization measures announced to date could reach almost €25 billion, equivalent to 15.3 percent of Ireland’s G.D.P. last year. Moody’s said that it expected Anglo Irish Bank, the most troubled, might need further support.
Ireland's National Asset Management Agency, also known as its “bad bank,” said Monday that it had completed the transfer of a second batch of loans from domestic banks, excluding Anglo Irish Bank.
The agency bought loans with a nominal value of €5.2 billion from Allied Irish Banks, Irish Nationwide Building Society and EBS Building Society at a 48 percent discount.
To date, loans with a nominal value of €20.5 billion of loans have been acquired by the agency for €10.4 billion.
The IMF last week said Dublin would not meet a European Union-agreed deadline to reduce its budget deficit to 3 percent of G.D.P. by 2014, also citing threats to Ireland's growth target.
The agency said growth would be below the historical trend over the next three to five years because banking and real estate will not contribute meaningfully, and because the decline in private-sector credit is dampening the growth outlook.
The Moody’s downgrade put its ratings in line with other agencies. S&P downgraded Ireland to AA in June 2009, after lowering it to AA+ from AAA in March 2009, while Fitch downgraded Ireland to AA+ from AAA in April 2009 and then to AA- in November 2009.
Moody’s has also downgraded, to Aa2 from Aa1, the rating of Ireland’s National Asset Management Agency, its so-called bad bank, whose debt is guaranteed by the government.
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