Ireland Rating Slashed to Near Junk; Outlook Negative

Last stop before junk; restructuring seen as not plausible

Ireland's rating Friday was sliced two more notches by Moody's to just above junk status, from Baa1 to Baa3, which is lower than either Fitch Ratings or Standard & Poor's rates the country.

Reuters reported that Moody's cited Ireland's rising debt level, weak growth prospects and a decline of the government's financial strength as reasons for its action. This came in the wake of a piece of rare good news; on Thursday the government had said it passed a review of its economic progress by its creditors, and Fitch actually upgraded its outlook.

Moody's, however, was not persuaded, and said in a statement, "Should the intended fiscal consolidation goals not be met, a further rating downgrade would likely follow. Moreover, a further deterioration in the country's economic outlook would also exert downward pressure on the rating." It also cited uncertainty about the outcome of European Stabilization Mechanism (ESM) solvency tests, and said that Dublin may need to institute more austerity measures so that the country can meet its goals. It also said that increases in European Central Bank (ECB) interest rate hikes could negatively affect its financial position.

Although Germany said for the first time that Greece may need to restructure its debt, Dietmar Hornung, vice president and senior credit officer at Moody's, was reported as saying that that was unlikely for Ireland.

"We don't see that as a plausible scenario. Restructuring from an investment grade rating is a remote scenario. Very remote," he said in the report. He continued, "Obviously debt dynamics are not favorable at the moment but we assess that as being sustainable. There are challenges though, that's why we went for a rating action today."

There was one bright comment from Moody's. It said that Ireland's growth potential was higher than for many other advanced countries, and that upward pressure on its rating may develop.

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