The rating agency slashed Ireland’s ratings to junk Tuesday, just three months after its last downgrade of the debt-soaked former Celtic Tiger. Moody’s warned that Ireland isn’t likely to be able to raise funds in the bond market after its current bailout loan expires at the end of 2013.
Ireland, laid low by its decision to bail out its reckless, feckless banks, took 85 billion euros ($122 billion) in aid last fall from the European Union and International Monetary Fund, promising to whip its flagging economy back into shape.
But digging yourself out of a giant hole isn’t easy. With 10-year Irish government bonds yielding the low, low rate of 14% in recent trading, Ireland “is likely to need further rounds of official financing before it can return to the private market,” Moody’s said.
The downgrade comes after a wild two weeks in which Europe’s debt crisis, long centered in weaker economies such as Ireland, Portugal and Greece, has moved into the supposedly more robust states of Spain andItaly. The sovereign debt selloff comes as European leaders tiptoe toward a plan to allow Greece to default on some of its bonds in a bid to reduce its debt load and stay out of the abyss.
Moody’s said it is becoming clear that such creditor haircuts are going to be part of any future aid package – which isn’t going to make it any easier for the weaker countries to raise money from investors in the foreseeable future.
Moody’s assumption surrounding increased private sector creditor participation is driven by EU policymakers’ increasingly clear preference — as expressed during the negotiations over the refinancing of Greek debt — for requiring some level of private sector participation given that private investors continue to hold the majority of outstanding debt. A call for private sector participation in the current round of financing for Greece signals that such pressure is likely to be felt during all future rounds of official financing for other distressed sovereigns, including Ba2-rated Portugal (as Moody’s recently stated) as well as Ireland.
The good news, such as it is, is that Ireland is still in much better shape than Greece. That’s not saying much, because at last look the credit markets were saying a Greek default has an 8 in 9 chance of happening within five years.
And if Greece does run off the rails in spite of official efforts to prop it up, Ireland could find itself in deeper trouble as well.
Although Ireland’s Ba1 rating indicates a much lower risk of restructuring than Greece’s Caa1 rating, the increased possibility of private sector participation has the effect of further discouraging future private sector lending and increases the likelihood that Ireland will be unable to regain market access on sustainable terms in the near future. This in turn implies that some Irish government bond investors would need to absorb losses. The increased risk of a disorderly and outright payment default or of a disorderly debt restructuring by Greece also increases the risk that Ireland will be unable to regain access to private sector credit.
Moody’s kept its outlook on Ireland negative, meaning it could downgrade again if the government misses its cost-cutting targets or if the market gets even more unruly. At the current rate, that could be next week.