Irish government too optimistic on GDP: S&P

LONDON (Reuters) - The Irish government’s growth assumptions are too optimistic and Ireland’s economy will struggle to grow at all over the next two years, ratings agency S&P said on Wednesday.

S&P cut Ireland’s rating to A from AA-minus on Tuesday and placed the sovereign on CreditWatch negative, a move that in two-thirds of cases results in a further downgrade in about a month’s time.

In a conference call to explain the decision, S&P said there were downside risks to growth and a strong chance the government would need to fund further capital injections into the troubled banking system.

“The fate of the government and the fate of Ireland’s banking system really are one and the same,” said Frank Gill, director of S&P’s EMEA sovereigns ratings group.

“Our new estimates are that the minimum cost to the government of injecting new capital into the system upfront will be around 50 billion euros which is 32 percent of GDP (gross domestic product). The last time we had a ratings action on Ireland was late August and at that point that was really our maximum.”

Gill reiterated that Ireland’s rating could be lowered again if the EU/IMF’s proposed aid package and the government’s 2011 budget failed to staunch wholesale funding outflows, or if the government’s commitment to fiscal consolidation started to waver.

The Irish government’s four-year austerity plan unveiled earlier on Wednesday assumes the economy will grow by an average of 2.75 percent in the years from 2011 to 2014, but S&P said nominal GDP would be “close to flat” over the next two years.

“That is a different projection from the government’s underlying assumptions which they published today in the national recovery plan,” said Gill.

“There is a meaningful difference.”

Fellow rating agency Moody’s has warned that a “multi-notch” downgrade of Ireland’s sovereign rating is likely once it has reviewed the government’s four-year fiscal plan, while Fitch has said it will review its rating once the detail of the IMF/EU aid package is known.

Reporting by Christina Fincher and Kate Holton; Editing by Ruth Pitchford