Tuesday, July 12, 2011

Moody's Cuts Ireland Credit to Junk *Likely to need more bailouts*

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Moody's cuts the Emerald Isle to Baa3 with continued negative outlook

(Reuters) - Ireland's credit rating was cut to junk status by ratings agency Moody's which said the country will likely need further rounds of official financing before it can return to international capital markets. Moody's cut Ireland's ratings by one notch to Ba1 from Baa3 and kept a negative outlook on the rating.

Still Some Irish Luck

"The downgrade certainly doesn't help. It will bring on some forced selling by investors who are not allowed to hold non-investment grade securities. Furthermore it will be dropped from some of the indices", said Robert Tipp, Chief Investment Strategist of Prudential Fixed Income. ""But one of the things that Ireland has going for it is that their compliance and execution of their program has been very favorable. As a result, should their return to market access be delayed, they will in all likelihood have a much easier time getting support from the European Union and the IMF since they have been holding up their end of the bargain. The other positive working for Ireland in that their long-run growth prospects are viewed as being more positive than those of the other peripheral European nations."

No Surprise

Suvrat Prakash, Interest Rate Strategist for BNP Paribas, said, "It's amazing that Ireland was still investment grade, it seems like a lagged effect to me. Now that the market has made up its mind what sort of rating is appropriate for Ireland, the market hasn't been strictly paying attention to these downgrades. However, the market is reacting. Credit spreads are widening, and stocks and rates moving a little lower on this news and mortgage bonds are wider. It looks like risk appetite has come off, but the news itself shouldn't be a surprise to anyone. A lot of people assume that these rating agencies tend to move with a lag, so there could be more downgrades to come. Sometimes it triggers forced selling from funds that can only hold bonds with a certain rating."

Contagion Fears

"This is the kind of story that will fan fears about contagion of Greece's credit crisis to the broader euro zone. Similar to Portugal getting downgraded last week, it was not a huge shock. But it just reminds investors of the contagion risk. Ireland was already under pressure, but if we see a default in Greece, it puts pressure on the banking system and could lead to acute stress for bigger economies like Spain and Italy. We've seen that played out in credit markets across the euro zone these last few days", says Omer Esiner, Senior Market Analyst, Commonwealth Foreign Exchange.

Bigger Fish to Fry

Chris Rupkey, Managing Director and Chief Financial Economist, Bank of Tokyo, added, "We've had a lot of downgrades recently and this one-notcher doesn't seem to be the proverbial straw that breaks the camel's back. The market may have bigger fish to fry here and is waiting for the (European Union) bank stress tests later in the week and the EU finance meeting on Friday which is looking at the widening of the crisis."

How Much Can You Rescue?

"I don't think the market really moved much on it. It seems to be nowadays that everyone is anticipating a sovereign downgrade. It didn't seem to move the dial too much and it certainly is continuing everyday. The question becomes how much can you rescue? It's constant and it seems futile at the end they're trying to continue to patch things. Most people anticipated this type of downgrade. If this was a year ago, everyone would've hit the sell button, but the markets almost been numbed to effect of sovereign issues. But the cumulative effect is still building", said Joe Saluzzi, Co-Manager of Trading, Themis Trading.

It's Not About Ireland

Carl Weinberg, Chief Economist, High Frequency Economics, observed, "The issue isn't Ireland any more. It's a problem but the whole focus right now is on resolving this Italian thing quickly. Italy is a big player. It's unambiguous they could cause a big ouch if they go belly-up, I don't think they will....Italy is not in unexplored territory any way (on making bond payments). There is no reason to think they could not raise the money if the markets let them. It's all about optics now and they're very bad now. If Greece can be fixed for real, no one will doubt they can do it."

Instant view: Moody's cuts Ireland to junk status | Reuters

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