The Government's effort to rebuild investor confidence faces a new threat after a big rating downgrade on Portugal raised fears that Ireland could be next, making a return to private markets more difficult.
The Moody’s downgrade on Portugal, heavily criticised by EU leaders, led to a new spike in notional Irish borrowing costs as fresh doubt was cast over the effort to bring the sovereign debt crisis under control.
Although Moody’s insisted last night that it continues to “differentiate significantly” between the weakest euro zone countries, analysts in Dublin said Ireland was likely to be the next country to see its sovereign debt rating downgraded to “junk” status.
Speaking this morning, however, Minister for Public Expenditure Brendan Howlin told Newstalk the Government believed Ireland will return to the debt markets by the end of next year despite rising bond yields.
The cost of insuring all weaker euro zone states’ debt against failure to repay rose after the Moody’s move and the euro and European shares fell. The turmoil came in advance of an expected increase in euro zone interest rates today when the European Central Bank governing council meets in Frankfurt.
However, some analysts said the expected increase won't affect economies in Europe's periphery that much. When asked how much harm an interest increase could do, HSBC Holdings chief economist Stephen King said the countries were "already paying a fortune to fund their deficits so the answer is probably not that much".
"The key question really is, to what extent will the increase in interest rates damage broader growth prospects across the euro zone?"
Moody’s, one of three leading international agencies, rates Ireland two notches above Portugal but at its lowest “investment” grade above a junk grade.
Only investors with a very large appetite for risk buy junk-rated bonds given the higher implied risk that the issuer may default, or fail to pay back the debt.
Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers, said bond markets had at least partially priced in the effect of a further downgrade on Ireland’s credit rating.
“If not re-entering the public funding markets has significance for a sovereign’s rating, then clearly if our view proves correct, then Ireland will suffer an imminent downgrade,” Mr O’Leary said.
Ireland is broadly on track in meeting its targets under the EU-IMF deal, but contagion from weeks of turmoil over the Greece debacle has put other bailout recipients under acute pressure.
Although Ireland’s bailout is predicated on the Government regaining access to market financing next year, concern persists in Government circles that the rescue effort could be swept off course by the Greek crisis.
“We are contributing to solving what is also very much a European problem. What is needed now, is to progress towards a European-wide solution,” Tánaiste Eamon Gilmore said yesterday.
Mr Gilmore said the Government will have talks with the ECB in the autumn on its controversial proposals to inflict losses on senior bondholders in Anglo Irish Bank and Irish Nationwide.
The Moody’s downgrade on Portugal came as global banking figures gathered in Paris to advance talks on a scheme to ensure private creditor participation in a second bailout plan for Greece.
The talks, organised by banking lobby group the Institute of International Finance, broke up without agreement after more than five hours. “There will be continuing meetings over the next few days until they reach a resolution,” said a spokeswoman for the institute.
With no deal imminent as the authorities confront complex technical challenges and the threat of a Greek debt default, officials are now working towards agreement on a second bailout in September.
Moody’s said the EU’s crisis-management effort and the ongoing attempt to ensure private creditor participation in the rescue effort was one of the main reasons behind its steep downgrade of Portugal.
But the manoeuvre prompted a storm of criticism, as a succession of officials, ministers and leaders questioned the logic of the downgrade only eight weeks into Portugal’s international bailout.
Additional reporting: Bloomberg
In Brussels, the agency’s action is held to have brought it across a “red line”.
“This unfortunate episode once again underlines the issue of the behaviour of the credit rating agencies and their so-called clairvoyance,” said the spokesman for EU economics commissioner Olli Rehn.
Similar complaints were heard as European Commission president José Manuel Barroso said the decision was fuelling speculation in financial markets.
