Irish Debt Rating Cut to Junk by Moody’s

By John Murray Brown
Financial Times
February 13, 2011

Moody’s cut the ratings of Irish banks to junk status on Friday following Dublin’s decision to defer previously agreed capital increases until after this month’s general election.

The downgrade means the unguaranteed unsecured senior bonds at Ireland’s six banks are now rated as non-investment grade, or junk.
Moody’s said recent announcements “call into question the government’s willingness to provide additional support to the banks beyond that which has already been provided to date, and reflect the increasing risk of some type of burden-sharing with senior creditors.”

Moody’s acknowledged the “huge fiscal burden faced by Irish taxpayers” as a result of the banking sector bail-out. But as a result it said there was an “increasing risk that this burden could be shared not only by subordinated creditors but by senior creditors, most likely through distressed exchanges.”

The rating agency said that “while some of these statements may reflect the current pre-election debate”, Irish government support for the banking sector “has become far less certain and more difficult to predict, resulting in a significant lowering of our support assumptions for all domestic Irish banks and the subsequent downgrades of the unguaranteed senior unsecured debt ratings”.

The downgrade of the unguaranteed senior unsecured debt amounts to just under €20bn across all Irish institutions. Bank of Ireland, the only big bank still listed on the main Dublin exchange, was cut from Baa2 to Ba1. AIB, which is set to be 92 per cent government owned, moved from Baa3 to Ba2. A similar downgrade was inflicted on EBS and Irish Life & Permanent. The nationalised Anglo Irish Bank, the specialist lender most exposed to the property crash that this week reported a record €16.7bn loss, was cut from Ba3 to Caa1, as was Irish Nationwide building society.

In addition, the long-term unguaranteed senior unsecured debt ratings of these banks have been placed on review for further possible downgrade.

Ross Abercromby, Moody’s Irish banks analyst, said that “if burden sharing did take place, it would result in substantially lower ratings”.

The moves come just two weeks ahead of the February 25 election, in which the centre-right Fine Gael party is expected to emerge with the largest number of seats and form a government with the centre-left Labour party, its traditional coalition allies.

In recent weeks both opposition parties have insisted the senior bondholder not covered by a September 2008 guarantee would be made to share the cost of the state’s bail-out of banks, which has already reached €34.7bn.

The Moody’s downgrade came as the European Union said it expected any incoming government to make capital injections into the banks “as soon as possible” to ensure respect for the terms of international bail out agreement between the EU and the International Monetary Fund.

“We understand this is temporary and the Irish authorities will proceed as soon as possible with this recapitalisation in order to bridge this capital ratio of 12 per cent as agreed under the programme,” Amadeu Altafaj, spokesman for Olli Rehn, the economic and monetary affairs commissioner told reporters in Brussels on Friday.

On Wednesday Brian Lenihan, finance minister, took markets by surprise when he announced the government no longer intended to provide €7bn of additional capital to Bank of Ireland, Allied Irish Banks and EBS building society, claiming that as a minority administration it had “no mandate” and would leave the decision to an incoming administration.

Opposition parties attacked the move as a “typical Fianna Fáil election stroke to avoid bad news in the last week of the election [campaign].”

Mr Abercromby said he could not anticipate what any incoming government might do. But he noted Mr Lenihan’s admission that Ireland had pressed for some burden-sharing as part of its negotiations with the European Union and International Monetary Fund in November when it secured an €85bn bail-out, including €35bn for its banking sector. The ECB then ruled out any such move for fear of the effect on other eurozone borrowers.

“That was only three months ago, and so whether that [attitude of the ECB] has changed, we would have to see.”

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