Ireland gets thumbs-up from EU/IMF

DUBLIN Fri Apr 15, 2011 7:01pm EDT

Pedestrians walk past a public house, in Dublin, January 24, 2011. REUTERS/Cathal McNaughton

Pedestrians walk past a public house, in Dublin, January 24, 2011.

Credit: Reuters/Cathal McNaughton

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DUBLIN (Reuters) - A Moody's downgrade and growing speculation Greece may eventually restructure its debt took the shine off Ireland's thumbs-up from the EU and the IMF on Friday for its efforts to claw its way back from crisis.

Dublin's creditors said the euro zone struggler had passed the first quarterly review of an 85 billion euro ($125 billion) bailout package but warned the new government that challenges remained, including spluttering growth.

"This program is a lifeline for Ireland," Ajai Chopra, the IMF's head of mission for Ireland, told a news conference.

"This crisis will not be over till we see jobs coming back."

The International Monetary Fund this week cut its 2011 forecast for Irish gross domestic product (GDP) growth to 0.5 percent from 0.9 percent and said unemployment would hit 14.5 percent, from 13.5 percent anticipated previously.

Moody's also cited Ireland's weaker growth prospects when it cut the country's rating by two notches earlier on Friday to the verge of junk status and kept its outlook on negative, meaning the next move could also be down.

The ratings cut pushed the euro to a session low against the dollar, falling to $1.4451, down 0.2 percent on the day.

Some investors fear the struggle to fully emerge from recession means Dublin will be unable to meet its debt obligations but Moody's Dietmar Hornung told Reuters that the changes of Ireland having to restructure were very remote.

"We don't see that as a plausible scenario," Hornung, vice president and senior credit officer at Moody's, said.

"Obviously debt dynamics are not favorable at the moment but we assess that as being sustainable. There are challenges though, that's why we went for a rating action today."

But investors are jumpy.

Germany's suggestion that Ireland's fellow bailout recipient Greece may have to renegotiate its debt has helped push Irish bond yields higher, eroding some of the goodwill Dublin won after it announced a radical overhaul of its banks on March 31.

The eruption of the Greek sovereign crisis last year sent Ireland's troubles, which center on its banks more than its public purse, into overdrive, forcing Dublin into its own European Union-IMF rescue package in November.

While Greece's debt mountain is expected to approach 160 percent of annual output by 2013, Hornung said he expected Ireland's loans to level off at a "sustainable" 120 percent.

But Ireland's cost of borrowing rose, with the yield premium investors demand to hold five year Irish paper rather than benchmark German bonds 35 basis points wider at 739 bps.

"It doesn't take much to move the market, it's so illiquid. Greece has put the restructuring issue back in the spotlight," said one Dublin-based dealer.

MEDIUM TERM GROWTH KEY

A government announcement on March 31 that the banks would be recapitalized by a further 24 billion euros and radically shrunk had been welcomed by investors who for the first time in nearly three years feel Dublin has a handle on its banks.

The EU and the IMF said the reforms were a "major step" and Finance Minister Michael Noonan said the recapitalization, the bulk of it coming from state coffers, would be completed by the end of July.

Irish banks' reckless lending helped fuel a disastrous property bubble that has left them dependent on emergency funding from the European Central Bank and their customers vastly indebted.

EBS Building Society posted a seven-fold increase in net losses on Friday to 590 million euros on the back of loan writedowns and provisioning and said its reliance on ECB funding had doubled after it lost 409 million euros in corporate deposits.

While the EU and the IMF believe Ireland's budget deficit will be 10.5 percent this year -- less optimistic than Dublin's 9.4 percent estimate -- they have not requested additional austerity measures.

The European Commission's country director for Ireland told Reuters that lower growth this year was not a big problem.

"We have not revised our medium term forecast and for debt sustainability, that's what matters," Istvan Szekely said.

"If views change around medium term growth, then that would be a major change."

But such positive nuggets were lost on investors who focused instead on problems in Athens.

"I don't think there is anything they could have said that would have really taken the market's mind off Greece," said Austin Hughes, economist at KBC Bank.

"If you look at the appetite for austerity, there is no doubt that Ireland appears to be more willing to take tough measures.

"But the simple trade is, 'We don't like countries with big debt with these sort of problems'. Ireland is too close to Greece in that perspective for the markets to make a really informed judgment."

(Additional reporting by Conor Humphries; Editing by John Stonestreet/Ruth Pitchford)

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Comments (4)
xiaodre wrote:
Cmon! Why would anyone believe what Moody’s says about anything? Why wouldn’t any news organization (or reporter for that matter) preface a Moody’s mention with their culpability in the financial crisis, and especially in Europe! Especially with ratings for AAA crap sold to Europeans by the billions that are now weighing heavily on the governments there?

All pretty relevant to this story if you ask me…

Apr 15, 2011 5:25am EDT  --  Report as abuse
cj_james wrote:
At least Ireland has someone to bail them out.. we are screwed in the USA.. why hasn’t moodys downgraded our rating? its not like we are going to even attempt to pay this debt off.. we are going to try to inflate out of it.

Apr 15, 2011 11:23am EDT  --  Report as abuse
raydarr wrote:
I agree with xiaodre. Moody’s shouldn’t even be still operating.They were ground zero of the mess we are in and yet they stand unashamedly still operating. The first thing we have to do to rid ourselves of this financial disaster is to rid ourselves of the agencies that were responsible for it and restore confidence in the banking system. Oops, sorry, that would make sense and, anyways, you finally come to the conclusion that those who rule the world, want this terrible fate to have befallen us….

Apr 15, 2011 11:31am EDT  --  Report as abuse
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