Fitch became the first ratings agency to strip Ireland of its ‘A’ credit status on Thursday, slashing it by three notches to BBB+ following the debt-stricken government’s request for an EU/IMF bailout. Fitch said that while Ireland had received relative security from the €85-billion euro emergency funds, the fiscal costs of restructuring and supporting its banks had triggered the downgrade.
“The scale and pace of the deterioration of public finances, continuing contingent fiscal and macro-financial risks emanating from the banking sector means that Ireland’s sovereign credit profile is no longer consistent with a high investment grade rating,” Fitch said in a statement.
It said its outlook on the rating was stable.
Fellow ratings agencies Moodys and S&P have Ireland on Aa2 and A ratings respectively but both have put the country’s sovereign rating on review for a possible downgrade.
Moodys said late last month that a multi-notch downgrade was the most likely outcome of a review expected to be concluded by early January but that Ireland would still remain within the investment-grade category.
Ireland is still higher than the BBB- rating -- one step above junk status -- that Fitch put fellow bailed-out euro zone member Greece on earlier this year.
Fitch added that Ireland’s highly uncertain economic outlook and loss of market access had also contributed to its move but that the €35-billion of emergency funds set aside for the country’s stricken banks had alleviated some concerns about future loan losses in the sector.
“That seems to be sufficient, though one can never tell in advance. It’s a reasonable amount of money,” Chris Pryce, Fitch’s primary analyst for Ireland, told Reuters when asked about the banks’ imminent further recapitalisation.
“I would expect it to be able to manage the losses that we currently expect on mortgage loans,” he added.
Fitch noted that the intensification of the financial crisis, combined with fiscal austerity, could stall Ireland’s incipient recovery.
Economic data on Thursday also reflected the underlying weakness in the economy.
Consumer prices fell 0.1 per cent in November to stand 0.6 percent higher than a year earlier, while analysts predicted deflation would continue into next year on the back of a record austerity budget unveiled on Tuesday.
The government has targeted €6-billion in spending cuts and tax hikes next year, hammering social welfare benefits and public pensions while bringing lower-income earners back into the income tax net.
“The whole package was very deflationary. Consumers aren’t going to be rushing out to spend money tomorrow so retailers will have to keep prices down,” said Alan McQuaid, chief economist at Bloxham Stockbrokers.
Separate data showed that Ireland’s seasonally adjusted unemployment rate rose to 13.6 per cent in the third quarter from 13.2 between April and June.
While jobless figures have been showing some signs of stabilisation, analysts expect them to settle at elevated levels amid a weak outlook for the domestic economy.
The long-term unemployment rate hit 6.5 percent in the third quarter, the highest rate since 1996, and the long-term unemployed now account for nearly half of those without a job.