Moody’s cuts Ireland’s debt rating, citing ‘loss of financial strength’

By Simon Kennedy and William L. WattsLONDON — Moody’s Investors Service on Monday cut Ireland’s sovereign debt rating by one notch to Aa2 from Aa1, citing the government’s “gradual but significant loss of financial strength.”

The firm said weakening debt affordability, lower economic growth prospects because of the severe downturn in the banking and real estate sectors, as well as liabilities from the bailout of the banking sector, all contributed to the downgrade.

Moody’s also lifted the ratings outlook on Irish government debt to stable from negative, saying the risks are now evenly balanced at the new rating.

The move, which comes a day ahead of Ireland’s planned auction of 1.5 billion euros (about $1.9 billion) of six- and 10-year bonds, wasn’t a big surprise, analysts said.

The euro stepped briefly lower after the announcement before rebounding.

The downgrade of Ireland comes less than a week after Moody’s cut Portugal’s government bond rating by two notches to A1 from Aa2, citing the likelihood of further deterioration in the nation’s finances.

“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,” Dietmar Hornung, Moody’s lead analyst for Ireland, said in a statement.

Ireland’s ratio of government debt to gross domestic product rose from 25% before the crisis to 64% by the end of 2009, and Moody’s said it expected further near-term deterioration in the country’s debt metrics to be severe. The government debt-to-GDP ratio is projected to stabilize at 95% to 100% over the next two to three years.

“Moody’s also expects economic growth to be below historical trend over the next three to five years,” the rating firm said. “Banking and real estate — the engines of Ireland’s growth in the years preceding the crisis — will not contribute meaningfully to overall growth in the coming years.”

The rating on Ireland’s National Asset Management Agency — the “bad bank” that has bought up risky loans from Irish lenders — was also cut to Aa2 from Aa1, as its debt is unconditionally guaranteed by the government.

The move leaves Moody’s Ireland rating in line with Standard & Poor’s at AA and one notch ahead of Fitch Ratings at AA-minus, said Gary Jenkins, fixed-income strategist at Evolution Securities, in a note to clients. He noted that Italy might be vulnerable to a downgrade as well.

Kennedy and Watts write for MarketWatch.com/McClatchy.