Brussels, 17/12/2010 (Agence Europe) - The agreement reached by the European Council at the end of this week on the permanent European Stability Mechanism will not be enough to dispel doubts still prevailing over Ireland's ability to stabilise its debt situation. The rating agency, Moody's, has slashed Ireland's credit rating by five notches to Baal with a negative outlook from Aa2 on Friday 17 December, one week after the Fitch rating, the first to stop granting the country an “A”.
There are three reasons for Moody's decision to downgrade Ireland: - the liabilities of the Irish banking sector, the uncertainty over the country's growth prospects, and the fall in the state's margins of manoeuvre, as Ireland is compelled to pursue tough austerity measures which are expected to weigh heavily on domestic demand and economic recovery. The rating agency has added that it could downgrade the country's rating still further if the government is unable to stabilise its debt parameters which, according to Moody's, may reach 120% of GDP in 2013, against 66% last year.
The fall in Ireland's rating immediately pushed Irish 10-year government bond yields 7.5 basis points higher to 8.522%, and the yield spread over German bonds rose, increasing the difference between them. The effect was felt even with regard to the euro, which fell compared to the Swiss franc, to pick up later, Reuters states.
The severity of Moody's decision has come as a surprise, all the more as Ireland has avoided recession during the third quarter, with growth of 0.5%. “I do not understand the decision”, President Sarkozy commented, cited by ANSA, confirming he had every confidence in the action taken by the Irish government to face up to the difficult situation in its public accounts. (F.G./transl.jl)