Moody’s cuts Ireland credit ratings to just above junk

Moody’s yesterday cut its credit ratings on Ireland by two notches to just above junk status, citing an “expected decline” in government finances that is set to hamper the indebted nation’s recovery.

“Moody’s Investors Service has today downgraded Ireland’s foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1,” a statement said.

It added that the outlook on the ratings “remains negative” – meaning further downgrades are possible.

Downgrades by ratings agencies like Moody’s can ramp up borrowing costs on markets for those hit, making their funding problems more difficult to manage, while eurozone member Ireland is already struggling to service its huge debt.

The new ratings for Ireland – which recently needed an international bailout worth €85 billion – is just one notch above BB, or junk status.

Government bonds afforded such a rating are said to carry high risk and thus need to offer sizeable yields to investors.

Explaining yesterday’s downgrades, Moody’s pointed to “further weakening of the Irish government’s financial strength, given the subdued economic activity and the crystallization of additional bank contingent liabilities.”

It added: “From a sovereign perspective, the recent completion of the Irish bank stress test has led to further bank contingent liabilities weighing on the government’s balance sheet.”

Ireland’s central bank last month ordered a drastic overhaul of the nation’s stricken banking sector as the cost of bailing out its lenders was set to top €70 billion.

On Thursday, the central bank forecast that the country would grow by only 0.9 per cent in 2011, down from an earlier estimate of one per cent.

Moody’s yesterday added that its Ireland downgrades were partly based on uncertainties surrounding how and under what circumstances the European Union might provide additional liquidity support.