Ratings agency Fitch has today cut Ireland's credit rating by two notches, citing the severity of its economic and fiscal downturn and prompting a retreat for the euro from earlier gains.
The move - the second in just over six months after a cut in April - reduced Ireland's sovereign rating to "AA-" from "AA+", skipping the 'AA' rating. But the agency put the outlook for the rating going forward on stable due to Dublin's aggressive measures to solve its problems.
The euro trimmed gains against the dollar and the yen while the spread between Irish and euro zone government bond yields widened on the Fitch move.
Ireland has regained some investor confidence with a commitment to cut its bloated budget deficit and to pay €54 billion to cleanse banks of their risky commercial property assets by setting up a "bad bank".
However, Fitch said Ireland's much steeper recession than in most other developed countries and the debt burden associated from establishing the National Asset Management Agency (Nama), the bad bank, contributed to its rating change.
"The agency notes the vigour of the government's fiscal consolidation response to date, the expectation of further aggressive budget tightening and the likely success of Nama in rehabilitating the banking sector," it said.
"All these factors have helped stabilise the outlook for Ireland's creditworthiness."
The euro briefly fell to around $1.4740 from around $1.4765 before the announcement. By 11.19am, it had pulled back to around $1.4750, and traded 0.2 per cent higher on the day.
The 10-year Irish Government bond yield rose, widening the spread against euro zone benchmark German Bunds by two basis points to 148 basis points after the Fitch news.
Five-year Credit Default Swaps, which price the cost of insuring Irish bonds, widened to 144.7 basis points from 142.4 basis points, monitor CMA DataVision said.
Although Nama's debt is likely to be accounted outside the Government's balance sheet, Fitch said it would still make gross Government debt more than quadruple to 110 per cent of gross domestic product by the end of 2010 from 25 per cent in 2007.
"The positive thing that you can take from this is that they kept the outlook stable which is probably more important," Goodbody analyst Dermot O'Leary said.
Fellow ratings firm Moody's stripped Ireland of its top "AAA" rating in July and Standard & Poor's has already cut by two notches. Fitch's first cut was in April.
"This downgrade is maybe the last after a series of downgrades if the government sticks to its policy," Mr O'Leary said.
Reuters