Ireland Update

Ratings agency Fitch cut Ireland's credit worthiness Wednesday, downgrading it to A+ from its previous AA- rating follows a similar move earlier this week by rival agency Moody's.
However, both Moody's and Standard & Poor's still rate Ireland at the higher grade of AA2 and AA-, respectively.

This had an immediate negative impact on Ireland's borrowing costs on international bond markets. The interest rate, or yield, that investors demand to buy Ireland's 10-year bonds rose to 6.4% Wednesday.

Next month Ireland will publish a 4 year deficit plan and will then unveil a 2011 budget that reduces debt by at least 4 billion euros, which could depress Ireland's already deflated economy.

“The downgrade of Ireland reflects the exceptional and greater-than-expected fiscal cost associated with the government's recapitalization of the Irish banks, especially Anglo Irish Bank,” said Chris Pryce, director of Fitch's government debt group. “The negative outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort.”

But Fitch said Ireland has enough cash stockpiled (more than 34 billion eruos, including its national pension reserves) and borrowing capacity to ride through the crisis, with full funding for government spending already secured through mid-2011. Excluding the bank bailout costs this year, Ireland's 2010 deficit is projected to reach 11.9 per cent, “a more appropriate measure of the underlying fiscal position.”

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