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Republic of Ireland Long-Term Rating Lowered To 'AA-' On Higher Banking Sector Fiscal Costs; Outlook Negative

Publication date: 24-Aug-2010 16:52:13 EDT

  • The projected fiscal cost to the Irish government of supporting the Irish financial sector has increased significantly above our prior estimates.
  • We are therefore lowering our long-term sovereign credit rating on the Republic of Ireland to 'AA-' from 'AA'.
  • The negative outlook reflects our view that a further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government's ability to meet its medium-term fiscal objectives.
LONDON (Standard & Poor's) Aug. 24, 2010--Standard & Poor's Ratings Services 
said today that it lowered its long-term sovereign credit rating on the 
Republic of Ireland to 'AA-' from 'AA'. At the same time, the 'A-1+' 
short-term rating on the Republic was affirmed. The outlook is negative. The 
transfer and convertibility assessment remains 'AAA', as it is for all members 
of the European Economic and Monetary Union.
     The downgrade to 'AA-' applies to other ratings that are dependent on the 
sovereign credit rating on Ireland, including the issuer credit rating on the 
National Asset Management Agency (NAMA), and the senior unsecured debt ratings 
on government-guaranteed securities of Irish banks. 
     "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. In light of the recent announcement of new capital 
injections into Anglo Irish Bank Corp. Ltd. (BBB/Watch Neg/A-2), our updated 
projections suggest that Ireland's net general government debt will rise 
toward 113% of GDP in 2012. This is more than 1.5x the median for the average 
of eurozone sovereigns, and well above the debt burdens we project for 
similarly rated eurozone sovereigns such as Belgium (98%; Kingdom of; 
AA+/Stable/A-1+) and Spain (65%; Kingdom of; AA/Negative/A-1+). 
     After a decade of rapid credit growth, which in our view greatly 
increased the risk profile of Irish banks, the Irish government has adopted 
what we view as a proactive and transparent approach to dealing with the 
financial sector's difficulties. We believe this should help foster a gradual 
recovery of the Irish economy over the medium term. Nonetheless, we believe 
that the government's support of the banking sector represents a substantial 
and increasing fiscal burden, which in our view will be slow to unwind. 
     We have increased our estimate of the cumulative total cost to the 
government of providing support to the banking sector from about ?80 billion 
(50% of GDP; see "Ireland Rating Lowered To 'AA' On Potential Fiscal Cost Of 
Weakening Banking Sector Asset Quality; Outlook Negative," published June 8, 
2009, on RatingsDirect), to ?90 billion (58% of GDP). For details on how our 
2010 estimate of Ireland's general government debt compares to official 
estimates, see Standard & Poor's commentary "Explaining Standard & Poor's 
Adjustments To Ireland's Public Debt Data," also published today. 
     Our estimate includes two main components: the upper end of our estimate 
of the capital we expect to be provided by the Irish government to improve the 
solvency of financial institutions, and the liabilities we expect the 
government to incur in exchange for impaired loans acquired from the banks.
     We have increased our estimate of the cost to the Irish government of 
recapitalizing financial institutions to ?45 billion-?50 billion (29%-32% of 
GDP) from ?30 billion-?35 billion (19%-22% of GDP). 
     "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," said Mr. Cullinan. Conversely, the outlook 
could be revised to stable if the Irish government looks more likely to 
achieve its fiscal target for the underlying general government deficit of 
less than 3% of GDP by 2014, or if the banking sector stabilizes more quickly 
and at a lower fiscal cost to the government than we now think likely. 
     Complete ratings information is available to RatingsDirect subscribers on 
the Global Credit Portal at and RatingsDirect 
subscribers at All ratings affected by this rating 
action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 
column.  Alternatively, call one of the following Standard & Poor's numbers: 
Client Support Europe (44) 20-7176-7176; London Press Office (44) 
20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm 
(46) 8-440-5914; or Moscow (7) 495-783-4011.
Primary Credit Analyst:Trevor Cullinan, London (44) 20-7176-7110;
Secondary Credit Analyst:John Chambers, CFA, New York (1) 212-438-7344;
Additional Contact:Sovereign Ratings;

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