Standard and Poor’s (S&P) lowered Ireland’s sovereign credit rating on Tuesday and warned of a further downgrade if fiscal costs of supporting the debt-laden country’s banking sector continued to rise.
The rating agency said it had lowered its long-term rating on the Republic of Ireland to “AA-” from “AA,” saying the projected fiscal cost to the government of supporting the financial sector had increased significantly.
“The negative outlook reflects our view that a further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government’s ability to meet its medium-term fiscal objectives,” the agency said in a statement.
The Irish government is struggling to manage its finances in the fallout from the crisis in Greece, whose debt and deficit woes threatened default and the eurozone generally.
S&P affirmed the “A-1+” short-term rating, as well as the “AAA” transfer and convertibility assessment on Ireland as it was for all members of the eurozone.
The downgrade to “AA-” applies to other ratings dependent on the sovereign credit rating on Ireland, including rating on the National Asset Management Agency and on government-guaranteed securities of Irish banks.
“The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility over the medium term,” S&P credit analyst Trevor Cullinan said.
S&P forecast that Ireland’s government debt would rise to 113 percent of its GDP in 2012, especially after state moves to inject new capital into Anglo Irish Bank.
This debt level, it said, was more than 1.5 times “the median for the average of eurozone sovereigns, and well above the debt burdens we project for similarly rated eurozone sovereigns,” such as Belgium and Spain.
S&P also increased its estimated cost to the Irish government of recapitalizing financial institutions to £45 billion to £50 billion (US$69.4 billion to US$77.1 billion).
“The negative outlook reflects our view that the rating could be lowered again if — as a result of its support for the financial sector or due to a more sluggish economic recovery — the government’s fiscal performance improves more slowly than we currently assume,” Cullinan said.
S&P said the outlook could be revised to “stable” if the Irish government looked more likely to achieve” certain fiscal targets or if the banking sector stabilized more quickly.
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