Ireland's credit rating may be cut to junk by Moody's Investors Service after Portugal yesterday lost its investment grade rating, analysts said today.
Moody's, which slashed Portugal four notches yesterday to Ba2 from Baa1, in April lowered Ireland's credit rating to the lowest investment grade Baa3 and left country's outlook on negative.
The ratings company cut Portugal's rating in part because the nation may not be able to return to debt markets in the second half of 2013.
Ireland has been locked out of markets since September, and the yield on 10-year Irish bonds has climbed 2.43 percentage points to 11.77 per cent since November 26th, two days before the European Union and International Monetary Fund agreed the country's rescue package.
"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," Cathal O'Leary, head of fixed income sales at Dublin-based NCB Stockbrokers, said in a note today.
The downgrade of Portugal highlighted "contagion risks" for Ireland, Goodbody Stockbrokers said today. Moody's said potential investor involvement in a new Greek bailout makes it more likely the EU will require creditors to eventually contribute to aiding the Portuguese.
Representatives of the European Central Bank, International Monetary Fund and European Commission, the so-called troika, are in Dublin today for the quarterly review of Ireland's bailout.
Minister for Finance Michael Noonan said yesterday he may seek a bigger budget correction than the €3.6 billion planned for 2012, to ensure the government meets its target of narrowing the fiscal deficit to 8.6 per cent of gross domestic product next year.
"Ireland may not be treated in the same manner as Portugal," Conall MacCoille, an economist at Dublin-based securities firm Davy, said in a note today, citing the government's progress in meeting its deficit goals.
Portugal joined Greece as the second euro country rated non-investment grade by Moody's, which suggested the government may struggle to meet the terms of its bailout. In the aftermath, Portugal's bonds slid, sending 10-year yields to a record.
The cost of insuring all weaker euro zone countries' debt against default rose and Portuguese two-term bond yields spiked by a whole percentage point on Moody's decision.
The euro and European shares fell on the news, ending a seven-day stocks rally, and Portugal had to pay more to sell three-month T-bills today.
The thumbs-down, coming so soon after a new centre-right Lisbon government announced austerity plans going beyond those demanded by international lenders, again called into question the EU strategy for dealing with the euro zone sovereign debt crisis.
Moody's said Portugal may need a second round of rescue funds before it can return to capital markets, just as European governments and banks are haggling over a second €120 billion bailout for Greece, which has a much higher debt ratio.
"Portugal is under considerable pressure as it leads another peripheral leg down," said Richard McGuire, a senior fixed-income strategist at Rabobank International. "Underpinning this move is arguably not so much the Moody's downgrade, but the comments accompanying this action, specifically the note that a further bailout and some form of private-sector support are increasingly likely."
The euro dropped to a one-week low against the dollar and yen today in response to the ongoing crisis.
"The European situation is really weighing on sentiment," said Jens Nordvig, a managing director of currency research at Nomura Holdings Inc in New York. "It's not only Portugal, but it's Italy and Spain. We had a pretty big rally at the end of last week, so we're giving back some of those gains now."
Bloomberg, Reuters
