STANDARD POOR’S has downgraded its outlook for the Republic of Ireland from stable to negative, and has warned that the country may lose its “AAA” sovereign credit rating if the Government’s attempts to boost the economy fail to improve growth prospects.
The US credit rating agency said that the downward revision reflects “mounting fiscal pressures” and “deterioration of key economic sectors”.
According to agency credit analyst Trevor Cullinan, a “negative” outlook indicates that there is a 30 per cent chance that the State will be stripped of its triple-A long-term sovereign credit rating within the next two years.
Such a deterioration in the State’s creditworthiness rating would further push up the cost of borrowing for the Government.
Commenting on SP’s announcement, Minister for Finance Brian Lenihan said yesterday: “It is quite understandable, given the figures in relation to the public finances, but we are not unique in the world in relation to the difficulties in the public finances and these difficulties will be addressed.”
Dermot O’Leary, chief economist with Goodbody Stockbrokers, described the SP downgrade as a “reflection of what the market already knows – that deterioration in Irish public finances is quite concerning. Markets have already judged that Ireland’s creditworthiness has decreased and the best measure of that is the Government bond issuance [on Thursday].”
The Government succeeded in raising €6 billion on Thursday through the sale of a five-year bond.
However, it had to pay 1.72 percentage points more than the cost of Germany’s existing five-year bonds, indicating that Irish sovereign debt is considered by investors to be a higher risk.
SP said that the single most important factor in the deterioration of public finances was the fall in revenue from capital gains tax and stamp duty.
These property-related taxes accounted for 15 per cent of total tax revenues in 2006, falling to 8 per cent in the first eight months of 2008, it noted.
Another cause for concern was the fact that general Government debt levels increased substantially between 2007 and 2008.
“The negative outlook reflects our view of the likelihood of a [rating] downgrade if ongoing fiscal measures to recapitalise the banks and boost the economy fail to improve competitiveness, diversity and growth prospects, thereby leaving a more difficult-to-manage debt burden,” Mr Cullinan added.
