DUBLIN — Ratings agency Standard & Poor's cut its credit grade for Ireland on Wednesday and warned it could fall further because of doubts about the true scale of defaulting loans yet to surface in the country's largely state-owned banks.
S&P joined fellow agencies Moody's and Fitch in dropping Ireland's credit score following the nation's November negotiation of a potential €67.5 billion ($93 billion) credit line from the European Union and International Monetary Fund. Ireland already has drawn down €8.4 billion ($11.6 billion) this year from that rescue fund — and plowed much of it straight into the cash-strapped coffers of Dublin banks.
Still, S&P's reduction Wednesday was just one notch to A minus, one step above the multi-grade cuts imposed last month by Moody's and Fitch. Both dropped Ireland into the higher-risk BBB tier in the immediate wake of the EU-IMF bailout deal. The BBB level is considered the lowest investment-grade rating, whereas BB and lower indicate "junk bond" status.
S&P senior analyst Frank Gill warned the agency could also drop Ireland's rating somewhere into the BBBs in April, once a new Irish government settles in and the impact of the current infusion of EU-IMF cash into Dublin banks can be assessed.
The S&P announcement coincided with Wednesday's formal launch of campaigning for Ireland's Feb. 25 election. The free-market government of Prime Minister Brian Cowen — who presided over the country's spectacular collapse from Celtic Tiger success in 2007 to a bank-crippled debtor today — is universally forecast to be ousted from power in favor of a left-leaning coalition.
The two parties expected to form the next coalition government, Fine Gael and Labour, are both campaigning on promises to reopen negotiations with the EU and IMF to loosen some of the strings attached to the aid deal.
Both question Cowen's determination to slash €15 billion ($21 billion) from the economy over the next four years through spending cuts and tax hikes. Troublingly, the two would-be government partners criticize Cowen's brutal austerity effort from opposite extremes, with Fine Gael favoring more cuts and Labour insisting on more taxes for the rich.
Gill warned that Ireland's economic forecasts presume that the total bank-bailout bill funded by taxpayers won't top €50 billion ($70 billion) while the current unemployment rate of 13.4 percent — near a 17-year high — will stabilize in 2011 and decline in 2012.
He noted the total debts of the six Irish banks — Allied Irish Banks, Bank of Ireland, Irish Life & Permanent, Anglo Irish Bank, Irish Nationwide and Educational Building Society — actually approach €275 billion ($375 billion), more than 170 percent of Ireland's gross domestic product.
"Irish domestic banks currently depend almost entirely on the (European Central Bank) to refinance expiring market debt," Gill said.
"Were the labor market to deteriorate further, a rise in the level of delinquencies in the domestic banks' mortgage books could result in higher new capital requirements than we presently assume," Gill said.
On the flip side, he said Ireland's prospects would be boosted if European Union leaders agree to change its bailout rules, which currently require donors to tack a profit margin on its loans of approximately 3 percentage points.
That means Ireland's EU-IMF loan package comes with an average interest rate of 5.8 percent rather than the donors' actual financing costs of 2.8 percent. This premium will add tens of billions to Ireland's annual deficits, which last year soared to a modern European record of 32 percent of GDP.
European leaders are also planning to discuss this week possible bailout-rules reforms that would make it easier for governments to negotiate hefty discounts on repayments to a bank's foreign creditors. Ireland so far has repaid tens of billions to those banks and hedge funds rather than risk poisoning the country's credit worthiness with a major default.
Ireland's government and main opposition parties remain publicly committed to a goal of slashing the deficit to just 3 percent of GDP by 2014, the limit that eurozone members are supposed to observe.
But that plan presumes Ireland's economy will grow by at least 2 percent each year, whereas the most recent forecasts from the Irish Central Bank and the Economic and Social Research Institute, Ireland's main think tank, expect much weaker growth if any in 2011.