August 17, 2011 / 7:35 PM / 8 years ago

RPT-UPDATE 2-DBRS keeps Ireland's A rating, spares ECB penalty

(Repeats to additional subscribers)

* ECB takes highest ratings when assessing collateral

* DBRS says downside risk persists to Irish export-led recovery

* Keeps Spain at AA, changes trends on debt to negative (Adds DBRS comments on Spain)

By Padraic Halpin

DUBLIN, Aug 17 (Reuters) - Canadian credit rating agency DBRS cut Ireland’s debt one notch on Wednesday but kept its A grade status, sparing the country’s banks a painful 5 percent penalty charge for using Irish bonds as collateral in return for crucial European Central Bank funding.

DBRS downgraded Ireland’s debt to A (low) from “A” and put its trend on negative owing to weaker-than-expected growth prospects even though the new government had shown strong commitment to fiscal consolidation.

The Toronto-based agency also changed its trends on Spanish debt to negative from stable but maintained it at AA, saying the rating balanced relatively low public-sector indebtedness and progress on fiscal targets with high fiscal deficits.

DBRS’s A (low) rating for Ireland compares with its three larger rivals’ much lower valuations, but the ECB looks at the highest of the ratings when assessing collateral.

Moody’s rates Ireland at Ba1, one notch below junk, while S&P and Fitch both have Ireland at BBB-plus, three notches above junk.

DBRS said that while Ireland was regaining competitiveness and that it could change its rating trend to stable, the downside risks to the country’s export-led recovery persist, especially given heightened uncertainty over the outlook in the United States.

“The evolution of Ireland’s ratings ultimately depends on the prospects for debt stabilisation. If fiscal targets are achieved and there is clear evidence of economic recovery, the trend could be changed to stable,” the ratings agency said.

“On the other hand, possible downward rating action could be triggered by fiscal slippage or a material worsening of Ireland’s growth prospects.”

DBRS said the the increased risks to U.S. growth also influenced its decision to put Spain’s trend on negative, as did the sharp rise in uncertainty in financial markets due to economy-wide funding conditions.

Moody’s put its Aa2 rating of Spain on review for possible downgrade last month. Moody’s rating is in line with fellow rating agency S&P’s AA setting, while Fitch Ratings has the country one notch higher at AA+. [ID:nLDE76S04W]

DBRS gained significance in Europe at the start of 2008 when the ECB added it to the a list of firms whose ratings govern which bonds can be used as collateral in its lending operations.

Irish banks, at the root of the country’s financial crisis, are dependent on emergency loans from the ECB to fund their day-to-day operations.

Ireland’s domestic banks had loans of 72 billion euros from the ECB at the end of June, around 15 percent of the total overall loans Frankfurt made to banks across the euro zone.

For a table of the ECB’s collateral haircuts, click: (Reporting by Padraic Halpin; Editing by Susan Fenton and Dan Grebler)

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