Irish bonds cut to junk status on bail-out worries*
Ireland's beleaguered economy has suffered another blow after its credit rating was cut to junk status on fears that it will need further bail-outs.
By Philip Aldrick and Amanda Andrews
12 Jul 2011
Ireland's rating was lowered to Ba1 from Baa3 on Tuesday night. Photo: AP
The country joins Portugal and Greece to become the third euro-area nation to be reduced to non-investment grade. The downgrade by Moody's came as it emerged European leaders will hold an emergency summit on Friday in an effort to contain fallout from the sovereign debt crisis sweeping the Continent.
Ireland's rating was lowered to Ba1 from Baa3 on Tuesday night. The country, which had a top Aaa rating just over two years ago, lost its investment status after the once booming property market imploded, causing banking collapses requiring huge bail-outs that saw the country's debt surge.
Moody's said that reason for the downgrade was a growing possibility that once the current €85bn European Union/ International Monetary Fund rescue package ends in 2013, Ireland is likely to need further bail-outs before it can return to the bond market.
The European Commission said it "regrets" Moody's decision to downgrade, adding it "contrasts very much with the recent data, which support a return to GDP growth this year, and the determined implementation of the [austerity] programme by Dublin".
Moody's had previously cut Ireland's credit rating two levels on April 15 to the lowest investment grade.
The developments for Ireland came on a second day of turmoil across the Continent during which Italian and Spanish bond yields hit record euro-era highs before suspected interventions by the European Central Bank (ECB) settled nerves, and European ministers admitted an orderly default on Greek debt is actively being considered.
Markets tumbled for a third consecutive day, although deep early losses were later pared back by moves to stop bond vigilantes targeting Spain and Italy.
George Osborne, who is not expected at Friday's meeting, urged Europe to step up its efforts after yesterday's meeting of finance ministers, saying: "The time has come for decisive action to address the crisis in the eurozone and prevent market uncertainty doing real damage to the world economy."
In a concerted effort to allay concerns, Italy pledged to speed up plans for €40bn of austerity measures, the euro group committed to ease the terms of rescue packages for Greece, Ireland and Portugal, and traders said the ECB had gone into the markets and bought peripheral nation's sovereign debt.
Despite their efforts, the euro slumped 0.4pc to $1.3986 and a record low against the Swiss franc as investors fled to safe havens. The FTSE 100 fell 1pc , Germany's DAX lost 0.8pc and France's CAC 40 eased 1pc.
The desperate measures were taken after the bond markets turned their sights on Spain and Italy, which Capital Economics warned "could mark the beginning of the end for the single currency union". Italy faces a key test at a bond auction on Thursday and Spain faces a similar test the following week.
On Tuesday morning, at the height of the panic, 10-year yields almost touched 6pc. Spain’s followed Italy’s up to 6.2pc. Both were euro-era records. In response, Mr Berlusconi accelerated plans to approve the €40bn budget cuts. Yields later dropped back to close down 12 points at 5.56pc for Italy and down 17 points at 5.81pc for Spain.
Italy’s action came as the Dutch finance minister Jan Kees de Jager said an orderly default for Greece “is not excluded any more”. EU economic affairs commissioner Olli Rehn added that the €440bn European Financial Stability Facility (EFSF), the area’s rescue fund, may buy back sovereign debt in the secondary market – a proposal backed by Mr Osborne.
Greek and Irish ministers also welcomed the euro group’s commitment to ease the terms of the original bail-outs.