Moody's has struck again. This time, the rating agency downgraded the credit rating assigned to the public debt of Ireland two notches to Aa2 from Aa1. The agency now shows a stable outlook, while they were negative before.
Moody's analysts explain this degradation by three factors. They rely on "the gradual loss and significant financial strength of the Irish government illustrated by rising deficits and the weakening of the country's repayment capacity." Growth prospects also weakened justify the gesture of the agency. The agency believes that the burden of debt relative to gross domestic product (GDP) is expected to stabilize around 95% to 100% within two to three years. Finally, doubts about the soundness of the banking system, following numerous recapitalizations of businesses have also influenced Moody's.The agency has referred to the substantial liabilities arising from the establishment of the NAMA (National Asset Management), a defeasance bank (or bank rotten ") service, which has to buy the Irish banks Tens of billions of subprime loans that they had accumulated before the credit crisis.
A budget deficit higher than that of Greece
In 2009, the budget deficit of Ireland, 14.3% of GDP was highest in the euro area, even superior to that of Greece, suffered a severe debt crisis. The Irish public debt has soared from 25% of GDP at end 2007 to 65% in late 2009.
Moody's has recently made several other cuts of notes on debt.The sovereign rating of Portugal has been degraded to A1 AA2 cons last week because of growth prospects remain relatively low and a deteriorating financial situation. Following the degradation cascade, investors may be less attentive to agency decisions.