13.7.2011

By Simon Miller

The Republic of Ireland has joined Portugal and Greece as Moody's reduced its status to non-investment last night.

The reduction to junk status is a blow to Ireland which has committed itself to severe expenditure cuts in a bid to restore its economy.

Moody's said the downgrade from Baa3 to Ba1 was a reflection on the growing possibility that Ireland was likely to need further bailouts following the end of the current EU/IMF programme in 2013.

In addition, Moody's said that the prospect of "any form of private sector participation in debt relief is negative for holders of distressed sovereign debt".

In its note, Moody's commented: "Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals."

Although Moody's acknowledged that Ireland had shown a strong commitment to fiscal consolidation, the rating agency "nevertheless notes that implementation risks remain significant, particularly in light of the continued weakness in the Irish economy".

Moody's also downgraded Ireland's short-term issuer rating by one notch to Non-Prime (commensurate with a Ba1 debt rating) from Prime-3.

In a related rating action, Moody's has downgraded by one notch to Ba1 from Baa3 the long-term rating and to Non-Prime from Prime-3 the short-term rating of Ireland's National Asset Management Agency (NAMA), whose debt is fully and unconditionally guaranteed by the government of Ireland. The outlook on NAMA's rating remains negative, in line with that of the government's bond ratings.

The downgrades came after European leaders met to try and resolve the situation in the periphery of the Eurozone as Italy and Spain faced a run on their bonds. The slide was halted after intervention, rumoured to be from either the European Central Bank or the Chinese government.