One month after Moody's Investment Services did so, Standard & Poor's has lowered the long-term credit rating of Ireland amid growing concerns with how the nation is handling its large debt.
S&P's downgrade to ‘AA-' places its rating on par with that of Fitch Ratings and one notch below Moody's, even after the latter's move in July to downgrade Ireland.
"The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term," said Standard & Poor's credit analyst Trevor Cullinan. "The negative outlook reflects our view that the rating could be lowered again if--as a result of its support for the financial sector or due to a more sluggish economic recovery--the government's fiscal performance improves more slowly than we currently assume."
S&P did note that the Irish government's newfound proactive and transparent approach to dealing with financial sector struggles "should help foster a gradual recovery over the medium term." Still, the Irish face much risk at present because of its gambles on the real estate market during the first half of last decade.
Irish officials went on the offensive blasting S&P's analysis as highly flawed. It was a similar sentiment after the Moody's downgrade. Moody's defended its move in July citing the following concerns:
- 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.
As previously noted in NACM's eNews and Business Credit Magazine, the drop in the Irish rating fits 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 their well-documented poor performance during the economic boom years in the United States and abroad. As a response to being considered overly positive last decade in the run-up to the global economic downturn, the trio is almost certain to operate with an increasingly conservative view for a long time to come.
Brian Shappell, NACM staff writer