Moody’s downgrades Ireland’s bond rating

Moody’s cut Ireland’s credit rating on Monday, warning the country still faces a slow climb out of recession after nearly two years of austerity as the cost of rescuing its banking sector mounts.

The rating agency’s one-notch drop to Aa2 came a day ahead of a scheduled sale of up to 1.5 billion euros of Irish debt, putting Moody’s on par with rival agency Standard and Poor’s AA rating and still one grade above Fitch.

The downgrade, which a minister said provided no surprises but which briefly weakened the euro against the dollar and hit European stocks, prefaced a sale of six- and 10-year bonds worth between 1 billion and 1.5 billion euros at Ireland’s regular monthly auction.

Moody’s also changed its outlook to stable from negative, and much of the hit to Irish bond markets was short-lived.

The spread of Irish 10-year bonds against their German equivalent widened 10 basis points on Monday from Friday to 301 basis points, their highest since July 2, before narrowing to 295 bps.

“The timing isn’t great, given the bond auction tomorrow and certainly this will add to the premium that will need to be paid to raise money,” Alan McQuaid, chief economist at Bloxham, said.

Dietmar Hornung, Moody’s lead analyst for Ireland, said the downgrade was “primarily driven by the Irish government’s gradual but significant loss of financial strength.”

Some of the euro zone’s toughest spending cuts last year gave Ireland respite from the market assault on other peripheral euro zone countries such as Greece, Spain and Portugal.

But Dublin’s fiscal discipline has been all but overshadowed by fresh rounds of bad news from the banks.

The cost of bailing out nationalized Anglo Irish Bank last year gave Ireland a budget deficit of 14 percent of gross domestic product, the highest in Europe, and this could rise to 20 percent this year, the state-funded Economic and Social Research Institute said last week .