Moody's cut casts doubt on Irish debt market return

By Lorraine Turner | Reuters –

DUBLIN (Reuters) - Moody's downgrade of Ireland to junk status will make it harder for Dublin to return to funding itself through debt markets next year and undermine its efforts to generate economic growth, government officials said on Wednesday.

Ireland, like Greece before it, had planned on returning to market funding next year as part of last year's bailout from the European Union and International Monetary Fund.

But in its statement late on Tuesday, Moody's said Ireland was also likely to follow Athens in needing a second bailout and Irish bond yields jumped to record highs in early trade, making it less likely Dublin can fund itself affordably on markets.

"The action by Moody's will make it more difficult for Ireland to access the markets next year," the National Treasury Management Agency's (NTMA) Oliver Whelan told national broadcaster RTE.

Portugal, Greece and Ireland are all struggling to generate enough growth to begin the long task of reducing high public debt burdens and Economy Minister Richard Bruton said the move by Moody's would also hurt the government's effort on that front.

"This means for certain investors, Ireland is now taken off their radar, they will not touch Irish borrowings, that is bad for us, that makes the whole job of recovery more difficult," he told RTE.

Moody's move comes a week after it slashed Portugal to junk status with a similar warning about the need for a second round of rescue funds. It reflects the rating agency's view that any further financial assistance from Brussels will require private investors to share part of the pain, possibly through a debt rollover or swap.

Whelan said he thought it was unlikely the private sector would become involved in a second bailout for Ireland.

"The fear which Moody's have is that a second bailout would involve private sector taking a haircut on their holdings of Irish government debt, we think that is quite unlikely," the Whelan said.

"We will be saying to people as we continue to implement the EU/IMF program...it is more and more unlikely that that solution would be imposed on us," he added.

European finance ministers have acknowledged for the first time that some form of Greek default may be needed to cut Athens' debts. If that materializes, Ireland's rating could be set for a further round of cuts.

The cost of insuring Irish debt against default rose on Wednesday, with five-year credit default swaps (CDS) rising to 1,015 basis points, up 22 bps on the day.

RESISTANCE

Unlike Greece, Ireland is meeting its bailout targets and Irish officials have felt frustrated at how their efforts have been swept aside by events in Athens. Ireland's debt to GDP ratio is expected to peak at 120 percent of GDP in 2013 compared to 157 percent for Greece.

Whelan acknowledged that some investors will be spooked by the downgrade but he said he expected Irish bond prices to prove resistant to the move, with Fitch and Standard and Poor's ratings still above junk.

"There will most likely be a knee jerk reaction but arguably a lot of this was already priced in," Glas Securities said in a note on Wednesday. "Ireland will remain within all the major bond indices which means that index matched investors will not be forced to sell."

Whelan and Bruton both said the decision to downgrade Ireland was heavily centered on the need for a European solution.

"A European-solution is required, it is in that broader context that the Irish problem will be solved," said Whelan.

(Additional reporting by Carmel Crimmins; editing by Patrick Graham)

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