S&P Cuts Ireland Rating to AA on Bank Rescue Cost

Standard and Poor's cut Ireland's sovereign credit rating for the second time in 3 months on Monday and warned it could fall further because of concern about the soaring cost of bailing out the country's banking sector.

Ireland is now rated at "AA" with a negative outlook, S&P said. It was previously "AA+" and the country had a precious "triple-A" rating only three months ago.

"The rating could be lowered again if asset quality in the Irish banking system deteriorates at a faster pace than we expect," S&P said in a statement.

________________________
Where's Ireland on the list?

• Slideshow: World's Biggest Debtor Nations

________________________

The cost of protecting Irish government debt against default rose to 221 basis points from 215 bps seen just before S&P said it was downgrading Ireland's debt, according to monitor CMA DataVision.

This means it now costs 221,000 euros per year to insure an exposure of 10 million euros of Irish government bonds.

CNBC.com

Ten-year Irish government bonds underperformed euro zone benchmark German Bunds, widening by four basis points to 204 basis points.

"This is a bit worrying for some of the other sovereign credits, with S&P moving so rapidly", said David Keeble, global head of interest rates strategy at Calyon.

"It's going to weigh on spreads and with a lot of supply in the periphery this week, that's just made it a step more difficult," Keeble said.

Rival rating agency Moody's warned in April that it could cut also Ireland's AAA credit rating within three months because of the country's soaring debt.

Fitch cut Ireland's AAA ratings by one level to AA-plus in April, the second highest, citing a severe economic downturn taking a "heavy toll" on public finances and said it holds a negative outlook for Ireland.

The former "Celtic Tiger" economy could see its historically low debt levels surge to potentially 100 percent-plus of Gross Domestic Product (GDP) next year, from about 41 percent last year, as it tries to cleanse its banking sector of tens of billions of euros in soured property loans.

A deep and protracted housing slump, after years of boom, has exacerbated the impact of a global recession, triggering a blowout in Dublin's budget deficit and raising doubts about the 10-year-old euro bloc's ability to deal with such strains.

"The timing of this is bad for the government. You'd have to assume that the opposition will use this as another thing to hit the government with," said Alan McQuaid, chief economist at Bloxham Stockbrokers.

"This is going to add to the pressure on them what with the vote of no confidence tomorrow," McQuaid said.

• Slideshow: Europe's Paper Tigers

Copyright 2009 Reuters. Click for restrictions.