DUBLIN (AP) — Moody's slashed Ireland's credit rating five notches on Friday and warned of further downgrades if the country cannot regain command of its debts and tame its deficit.
Dietmar Hornung, the senior Ireland analyst for Moody's, said it remained an open question whether Ireland could sharply reduce its deficit from its eurozone-record levels while taking tens of billions from a new EU-IMF bailout fund.
Mr. Hornung lauded Ireland's deficit-fighting plan to impose 10 billion euros ($13 billion) in cuts and 5 billion euros ($6.5 billion) in tax increases by 2014 — but nonetheless cautioned that pulling so much money out of an already fragile economy "represents a further considerable drag on the country's recovery prospects."
Moody's dropped Ireland's rating to Baa1 — just three steps above junk-bond status — in a move similar to last week's BBB+ downgrade by rival ratings agency Fitch. The other major agency, Standard & Poor's, cut Ireland two notches to A on Nov. 23 and is expected to drop its grade further in coming days.
While Fitch has put Ireland on a stable outlook, meaning no further downgrades are expected, Mr. Hornung said Moody's was keeping Ireland on a negative outlook because it sees more negatives than positives in Ireland's future.
He said Ireland remained vulnerable to further dud-loan shocks in its banks, which invested hundreds of billions in foreign borrowings on Ireland's runaway property market during the Celtic Tiger boom of 1994-2007 — and has suffered catastrophic losses since the market collapsed in 2008.
Ireland that year imposed a blanket guarantee on all Irish banks' debt obligations in a failed effort to keep their funding streams healthy. Ireland has since has been forced to nationalize or take major equity stakes in five of the six insured banks — and funded bailouts estimated to total euro50 billion ($65 billion) — as unconvinced investors continued pulling their money out of the banks.
The loan agreement reached Nov. 28 in Dublin with the European Union and International Monetary Fund will provide Ireland a credit line of up to 67.5 billion euros ($90 billion) at interest rates averaging 5.8 percent. EU and IMF regulators also permitted Ireland to redeploy 17.5 billion euros ($23 billion) from its own cash and pension reserves, taking the total bailout figure to 85 billion euros ($113 billion).
Mr. Hornung estimated that the extra debt financing would drive Ireland's national debt to a peak of 140 percent of gross domestic product in 2013, compared to 66 percent in 2009. That figure is higher than the debt-to-GDP forecasts of many economists.
Investors dumped Irish bonds Friday on news of the downgrade. The yield on 10-year Irish bonds rose to 8.4 percent, a two-week high.
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