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Irish Rating Downgraded To Junk Status

August 2011 - Finance. Legal Developments by Hassans.

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Ireland has been hit with its worst ever debt rating, joining the beleaguered Portuguese and Greek economies in its classification as "junk".

The credit rating agency Moody's made the announcement on July 12, dropping its Irish rating one notch, from Baa3 to Ba1. The decision comes just three months after an earlier two-notch downgrade by the agency, from Baa1 in April. Only two years ago, Ireland enjoyed the top Aaa rating. The negative outlook has been maintained by the agency.

Now, amid increasing economic uncertainty in the eurozone, Moody's has pointed to the manner in which the European Union (EU) and International Monetary Fund (IMF) are changing their demands on bailed-out countries as a reason for its decision. Moody's cites the current renegotiations on the refinancing of Greek debt and the possible requirement of some private sector participation, arguing that such pressure is likely to be felt during all future rounds of official financing for other distressed governments, including Ireland. Such a development would be seen as negative for holders of distressed government debt.

In addition, Moody's believes that there is a growing possibility that Ireland will need to secure more financial aid before it can return to the private markets. This could mean an additional bailout once the current package expires in 2013. While it notes that the Irish government is committed to fiscal consolidation, and that it has, to date, met its bailout objectives, the agency argues that there remain significant implementation risks to deficit reduction plans, particularly in light of the economy's weakness. Nonetheless, Moody's acknowledges the economy's competitiveness and business-friendly tax environment and states that, after a period of prolonged retrenchment, its long-term potential growth prospects remain higher than many.

A spokesman for the Department of Finance called the news a "disappointing development", and said it was "completely at odds with the recent views of other agencies". Standard & Poor's and Fitch currently hold Ireland above junk status. In addition, the move was criticixed by a spokesman for the EU commissioner Olli Rehn, who stated that it contrasted with recent data and the government's strong action on its bailout commitments.

Ireland is currently undergoing its third review under the EUR85bn EU/IMF bailout programme. It had been reported in the days immediately preceding Moody's announcement that it was looking increasingly likely that Ireland would receive a reduced interest rate it pays on its rescue package. Jean Claude Junker, who heads the Eurogroup of finance ministers, has been quoted as saying that Europe could expect to see plans for lower bailout interest rates brought forward very soon. The plans would be applicable to Ireland.

A Department of Finance spokesman said the government welcomed the plans. They are not expected to include a "quid pro quo" arrangement, under which Ireland would be required to increase its 12.5% corporate tax rate, as had been favoured by France in particular. Finance Minister Michael Noonan, speaking on Irish radio, argued that, were the interest rate reduced from 5.8% by the predicted 1%, this would improve the country's position.

The present EU/IMF visit to Ireland is expected to conclude by July 14.

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