Moody's Investment Services served up the news that it was cutting Ireland's government bond rating, to a still somewhat solid Aa2 rating, for the second time this summer citing the following:
- The government's gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability (as represented by interest payment to government revenue).
- Ireland's weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit.
- The crystallization of contingent liabilities from the banking system, as represented by a series of recapitalization measures and the need to create the National Asset Management Agency (NAMA), a government-created special purpose vehicle that is acquiring impaired loans from banks.
"At the Aa2 rating level, the upside and downside risks are evenly balanced. If the GDP growth trend were to exceed Moody's expectations--- with a quick resumption of domestic credit flow and a supportive global economic environment ---then the government's debt metrics could stabilize earlier than is currently being assumed," said Moody's Vice President/Senior Credit Officer Dietmar Hornung.
It's been widely speculated that additional downgrades are unlikely for the foreseeable future for Italy and Spain. And, for their part, ratings agencies Fitch and Standard & Poor's did not cut Ireland's rating, as the trio has for most if not all of the other PIIGS nations at least once during the spring/summer.
Still, the drop in the Irish rating does appear to fit into predictions that ratings agencies would react with extreme caution, at times possibly overreacting to credit concerns, because the big three's respective reputations were impaired so badly due to the well-documented poor performance during the economic boom years in the United States and abroad.
"They've become much more conservative, and that's likely to stay for a while," said NACM Economic Advisor Chris Kuehl, Ph.D. of Armada Corporate Intelligence. "Everything is getting downgraded. You're seen downgrading of several countries, which has irritated the Europeans. They have been stung for being too positive, so they're going the other direction."
Brian Shappell, NACM staff writer