EDITED VERSION of the note Standard & Poor’s sent out to explain why it is putting Ireland’s “BBB+” long-term and “A-2” short-term sovereign credit ratings on review for possible downgrade.
RATIONALE
“The CreditWatch placement is prompted by our concerns about the potential impact on Ireland of what we view as deepening political, financial and monetary problems within the euro zone. To the extent that these issues depress export demand from Ireland’s European Union trading partners, and further constrain credit in a private sector already delevering following the banking crisis, its economic growth outlook – and therefore the prospects for a sustained reduction of its public debt ratio – could be affected.
POLITICAL SCORE
“In our view, the overall consistency, predictability and effectiveness of policy co-ordination among institutions within the euro zone has weakened at a time of severe ongoing fiscal and economic challenges to a degree more than we envisioned. For Ireland, we believe this environment could have implications for the Government’s ambitious fiscal consolidation strategy. Since 2008, the authorities have adjusted the budget by almost 13 per cent of estimated 2011 GDP and, for 2012, additional fiscal savings of some 2.4 per cent of GDP are planned. Against this background, we will review the Government’s strategy for maintaining political support for its fiscal policy in the event that an export-led economic recovery materially underperforms.
EXTERNAL SCORE
“Our concerns relate to the increased risk we see that Ireland’s banking system may be unable to meet external financing needs due to the impact on Ireland of deepening political, financial and monetary problems at the euro zone level. However, we view this as less of a concern for Ireland than it is for some other euro zone sovereigns. In our view, following the recent crisis in the Irish financial system, interbank lending is not currently an important source of funding for Irish banks. We do not expect any further material costs to the Government resulting from capital injections to the domestic banking system over and above the €64 billion already injected.
MONETARY SCORE
“We will review the ECB’s policy settings and their impact on financial market conditions, the real economy and ultimately Ireland’s creditworthiness.
“We expect to conclude our review as soon as possible after the European summit on December 9th.”
