3rd Dec 2022

Ireland downgraded to 'junk' in spiralling euro-crisis

  • Euro-crisis: France could be the next in line after Italy and Spain (Photo: photosteve101)

US-based credit rating agency Moody's on Tuesday (11 July) downgraded Ireland's debt to junk status, amid growing market concerns about the stability of the eurozone as the debt crisis reaches Italy and Spain.

Citing the "growing possibility" that Ireland may need a second bailout at the end of 2013 and the "increased" likelihood that this bailout will require private sector participation, Moody's downgraded the country's rating by one notch to Ba1 status - meaning that its bonds are now considered "non-investment grade" and pensions funds, for instance, are no longer allowed to purchase them.

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Moody's made the same move last week when it downgraded Portugal's rating by three notches to Ba2 status. Greece's rating is considerably lower - Caa1 which stands for "substantial risk", just three steps before what a rating agency considers "default" and with no perspective for investors to recover their money.

With EU finance ministers insisting - following pressure by Germany, the Netherlands and Finland - on having private creditors involved in a second Greek bailout, Moody's warns that "the outlook remains negative" and that similar pressure will be felt on each of the countries next in line for a second refinancing.

"Although Ireland's Ba1 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the increased possibility of private sector participation has the effect of further discouraging future private sector lending and increases the likelihood that Ireland will be unable to regain market access on sustainable terms in the near future," it said.

The same is true if Greek debt is restructured, even if this is done through financial re-engineering of EU banks, says the ratings agency.

European Investment Bank chief Philippe Maystadt on Tuesday said that the eurozone will buy back Greek bonds at market rates, in order to relieve some of its €168 billion debt, whose costs are spiralling due to the bad rating.

"There is a proposal which is backed by the European Central Bank (ECB), by the European Commission, and which we are going to discuss, which would consist in enabling the European Financial Stability Fund (EFSF) to buy back Greek bonds at market rates," he said on RTL tv following a meeting of eurozone finance ministers on Monday.

Maystadt also confirmed the likelihood of a special EU summit in the coming days to deal with the spreading debt crisis that has reached Italy and Spain.

"Markets abhor uncertainty," he said. "When a situation is unclear markets think the worst. Therefore they must be reassured and it must be done with clarity."

A similar push for eurozone leaders to announce some clear measures came Tuesday from former French finance minister Christine Lagarde, currently head of the International Monetary Fund.

"The IMF welcomes the statement by the Eurogroup reaffirming their commitment to safeguard financial stability in the euro area. We look forward to the prompt implementation of the important measures outlined in their statement," she said in a statement.

After weeks of haggling and a decision to postpone until September an agreement on a second Greek bailout, finance ministers on Monday were forced by the Italian crisis to break the taboo of having the EU bailout fund (EFSF) buy up Greek debt.

Meanwhile, a study ran by the German financial paper Handelsblatt shows that the next country in trouble "in the medium term" may be France, if private sector indebtedness is considered.

Solvency is a big problem in the southern countries - Greece, Portugal, Cyprus and Malta - but Italy, Spain and even France are also on a dangerous path, the study claims.

ECB says more rate hikes to come

European Central Bank president Christine Lagarde said more rate hikes will come, but also admitted a recession will not lower inflation — leaving some economist question the logic of the policy.

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