Ratings agency Moody’s said yesterday the Republic’s vulnerability to Europe’s continuing financial crisis was the main reason behind its decision to assign junk-bond status to the State’s sovereign debt.
Moody’s, one of a trio of agencies that assess countries’ and corporations’ ability to repay their debts, provoked controversy yesterday by re-affirming its long-standing rating of the Republic’s national debt at Ba1 with a negative outlook.
The rating means the agency believes there is a substantial risk the State will be unable to repay its debts, and that investors should treat it as speculative grade, or “junk”.
Its rivals – Fitch and Standard & Poor's – both upgraded the Republic's rating to investment grade last year, meaning they regard it as carrying a far lower risk, but Moody's has consistently refused to follow them.
Repercussions for interest
The agencies' view of the State's creditworthiness can affect the interest paid on its debts; as a low rating implies a high risk, lenders will seek higher interest rates from the borrower.
Moody's analyst Kristin Lindow told The Irish Times yesterday the agency is not changing its rating because the overall European situation remains volatile.
"The bailout of Cyprus and the dislocation that that has caused demonstrates this," Ms Lindow argued, adding that Europe is still dealing with a deep financial crisis.
Her formal statement, issued late on Wednesday night, explains that the Republic’s high debt levels and its banks’ poor asset quality leave it susceptible to events in the wider euro area.
Ms Lindow goes on to say the EU’s unprecedented decision to fund the Cyprus bail out by levying bank deposits illustrates the risks that arise from that susceptibility.
“The move has significantly heightened fears surrounding the safety of bank deposits in other European systems,” she says. More generally, she says the uncertainty created by EU policymakers’ handling of the Cypriot crisis underlines the Republic’s vulnerability to wider euro area pressures.
Ms Lindow also said the poor quality of assets held by the banks, which is preventing them from meeting increased demand for credit, was the second driver behind leaving the State’s credit rating unchanged.
“Moody’s notes that Irish banks have not yet begun implementing the Central Bank of Ireland’s new requirement to repossess homes when mortgages have been non-performing for a lengthy period, nor to adequately provision for their non-performing portfolios,” she says.
She argues the banks have enough capital to be able to accommodate dealing with these issues without adding new liabilities to the State’s balance sheet.
Reluctance to lend
Speaking yesterday, Ms Lindow agreed Irish banks are now very well capitalised. However, she said their reluctance to lend
money to those who want to borrow is likely to continue until they deal with debts that are not being repaid.
In the medium term, Ms Lindow did suggest the Republic would be the first "programme country" to exit its bailout and be able to borrow normally from the capital markets, but she argued that the European Central Bank was likely to have the final say about this.
Moody's statement prompted Stephen Lyons and Joseph McGinley, credit analysts at stockbroking firm Davy,s to say the agency was using a "Cypriot figleaf" to justify its position. They argued that the agency is using the wider European picture to obscure progress on the domestic front.
