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Ireland Downgraded By Moody's

Moody’s cut Ireland’s credit rating on Monday, warning the country faces a slow climb out of recession as the cost of a rescue of its banking sector mounts, Reuters reports. Moody’s also changed Ireland’s outlook to stable from negative.

“The timing isn’t great, given the bond auction tomorrow and certainly this will add to the premium that will need to be paid to raise money.”

Alan McQuaid


The one-notch downgrade to Aa2, which came a day ahead of a scheduled sale of up to 1.5 billion euros of Irish debt, put Moody’s on par with rival agency Standard and Poor’s AA rating and still one notch above Fitch. Moody’s also changed its outlook to stable from negative.

The downgrade, which a minister said provided no surprises but which weakened the euro versus the dollar and hit European stocks, prefaced a sale of six- and 10-year bonds worth between 1 billion and 1.5 billion euros at Ireland’s regular monthly auction.

“The timing isn’t great, given the bond auction tomorrow and certainly this will add to the premium that will need to be paid to raise money,” Alan McQuaid, chief economist at Bloxham, says.

“Today’s downgrade is primarily driven by the Irish government‘s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,” Dietmar Hornung, a Moody’s vice president and lead analyst for Ireland, says in a statement.

Some of the euro zone’s toughest spending cuts last year gave Ireland a brief respite from the market assault on peripheral euro members, but its fiscal rectitude has been all but overshadowed by fresh rounds of bad news on the banking front.

The cost of bailing out nationalized Anglo Irish Bank last year gave Ireland a budget deficit of 14 percent per gross domestic product, the highest in Europe, which could rise to 20 percent or more this year, the state-funded Economic and Social Research Institute (ESRI) said last week.

With Ireland have emerged from the euro zone’s longest running recession in the first quarter, Moody’s says it expects Irish medium-term economic growth of 2-3 percent per year, below the 4 percent projection built into the government’s fiscal program.

Moody’s says banking and real estate — engines of growth in the years preceding the country’s crisis – would not contribute meaningfully to overall growth in the coming years.

“It’s really not telling us anything that we don’t know already,” Martin Mansergh, Ireland’s minister of state for finance, says.  “We all know that banking and real estate are not going to be sources of growth.”

The IMF last week said Dublin would not meet a European Union-agreed deadline to reduce its budget deficit to 3 percent of gross domestic product (GDP) by 2014, also citing threats to Ireland’s growth target.

While the Irish public has so far grudgingly accepted fiscal tightening, a senior official in Prime Minister Brian Cowen‘s governing coalition said on Sunday voters might not be ready to accept all the cuts still envisaged by the government.

On the positive side, Ireland does not face any major bond redemptions this year and it has raised enough bonds to see it through to the first quarter of 2011 regardless of the outcome of upcoming monthly auctions, officials says, according to Yahoo Finance.

Moody’s action also suggested the country was close to hitting its ratings floor, says David Schnautz, a Commerzbank strategist in London.

“They … stabilized the outlook, which might indicate that we’re much closer to a bottom in ratings. …This is something which in the end should turn out to be supportive for Irish bonds and (euro zone) peripherals as well.”

The spread of Irish 10-year bonds against their German equivalent widened on Monday to 300 basis points, their highest since July 2.

Here’s Moody’s Press Release:

Frankfurt, July 19, 2010 — Moody’s Investors Service has today downgraded Ireland’s government bond ratings to Aa2 from Aa1. The main drivers for the downgrade are:

1. The government’s gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability (as represented by interest payment to government revenue).

2. Ireland’s weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit.

3. The crystallization of contingent liabilities from the banking system, as represented by a series of recapitalization measures and the need to create the National Asset Management Agency (NAMA), a government-created special purpose vehicle that is acquiring impaired loans from banks.

Moody’s has changed the outlook on the ratings of the government of Ireland to stable from negative as the rating agency now views the upside and downside risks as being evenly balanced at the current rating level.

Moody’s has also affirmed Ireland’s short-term issuer rating of Prime-1 with a stable outlook. Ireland falls under the Eurozone’s Aaa regional ceilings for bonds and bank deposits, which are unaffected by the Irish government’s downgrade.

Moody’s has also downgraded to Aa2/stable outlook from Aa1/negative outlook the rating of Ireland’s National Asset Management Agency (NAMA), whose debt is fully and unconditionally guaranteed by the government of Ireland.

RATIONALE FOR DOWNGRADE

“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability,” says Dietmar Hornung, a Moody’s Vice President — Senior Credit Officer and lead analyst for Ireland. The country has suffered a dramatic contraction in GDP since 2008, causing a sharp decline in tax revenue. The general government debt-to-GDP ratio rose from 25% before the crisis to 64% by the end of 2009, and is continuing to grow.

Moody’s also expects economic growth to be below historical trend over the next three to five years for two reasons. Firstly, banking and real estate — the engines of Ireland’s growth in the years preceding the crisis — will not contribute meaningfully to overall growth in the coming years. Secondly, the fall in private sector credit is dampening the growth outlook. The ongoing credit contraction reflects both (i) the tightening in credit supply, due to balance sheet constraints among lenders; as well as (ii) the weak demand for credit as a consequence of a broad de-leveraging process in which the household sector is seeking to repair its balance sheets through increased savings (or reduced dissavings).

The third key factor driving Moody’s rating action is the crystallization of contingent liabilities from the banking system as a result of the government taking on debt to provide support to the country’s ailing banks. Overall, the recapitalization measures announced to date could reach almost EUR25 billion (equivalent to15.3% of Ireland’s 2009 GDP) — and Moody’s expects that Anglo Irish Bank may need further support. In addition, the government created NAMA, a special purpose-vehicle that is acquiring loans from participating banks at a discount in exchange for government-guaranteed securities. While we do not expect the government — not even in a moderately stressed scenario — to incur permanent losses in excess of 25% of the country’s 2009 GDP as a result of these obligations, we believe that the uncertainty surrounding final losses would exert additional pressure on the government’s financial strength.

While Moody’s expects the near-term deterioration in the government’s debt metrics to be severe, the rating agency nevertheless expects the general government debt-to-GDP ratio to stabilize at 95% to 100% over the next two to three years. Given Ireland’s wealthy and flexible economy and its very high institutional strength, these debt levels are commensurate with a Aa2 rating. Ireland’s demonstrated adjustment capability and its economic vitality — reflected for instance in its ability to attract foreign direct investment — are important characteristics that support the rating.

RATIONALE FOR STABLE OUTLOOK

At the Aa2 rating level, the upside and downside risks are evenly balanced. “If the GDP growth trend were to exceed Moody’s expectations — with a quick resumption of domestic credit flow and a supportive global economic environment — then the government’s debt metrics could stabilize earlier than is currently being assumed,” says Mr. Hornung.

On the other hand, Moody’s notes that the country could experience downward rating pressure in the event of (i) a failure of the economy to rebound in a meaningful way; and/or (ii) a severe deterioration in the country’s debt metrics triggered by a further crystallization of bank contingent liabilities beyond Moody’s current expectations.

For further information, please refer to Moody’s Special Comment entitled “Key Drivers of Ireland’s Downgrade to Aa2,” which is available on http://www.moodys.com.

PREVIOUS RATING ACTION & METHODOLOGY

Moody’s last rating action affecting Ireland was implemented on 2 July 2009, when the rating agency downgraded Ireland’s government bond ratings to Aa1 and assigned a negative outlook. Prior to that, Moody’s last rating action on Ireland was taken on 17 April 2009 when the rating agency placed the government bond ratings on review for possible downgrade.

Moody’s last rating action affecting NAMA was implemented on 16 June 2010, when the rating agency assigned an initial rating of Aa1 with a negative outlook to the senior unsecured debt issued by NAMA, which is backed by a full guarantee from the Irish government.

The principal methodology used in rating the government of Ireland and NAMA is “Moody’s Sovereign Bond Methodology”, which was published in 2008 and can be found at http://www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.

Link

Stocks Recover

After a sharp drop this morning, the Irish stock market have regained most of its losses, and the Overall Irish Index is down 0,55% at the moment.

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Pound Slides

EUR/GBP:

GBP/USD:

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Moody's May Be Downgraded by Standard & Poor's

What can I say? The insanity of the crisis have reached another milestone….. This is just in:

“On June 29, 2010, Standard & Poor’s Ratings Services placed its ‘A-1’ short-term rating for Moody’s Corp. on CreditWatch with negative implications.”

Standard & Poor’s

Standard & Poor’s Rating Service have just released the following press release:


Overview

* We believe there may be added risk to U.S.-based credit rating agency Moody’s business profile following recent U.S. legislation that may lower margins and increase litigation related costs for credit rating agencies.

* We are placing our ‘A-1’ short-term rating for Moody’s on CreditWatch with negative implications.

* We expect to resolve the CreditWatch listing in the near term.

Rating Action

On June 29, 2010, Standard & Poor’s Ratings Services placed its ‘A-1’ short-term rating for Moody’s Corp. on CreditWatch with negative implications.

Rationale

The CreditWatch listing reflects our view that an increased level of business risk is likely following the announcement that the Financial Reform Conference Committee has reconciled bills from the U.S. Senate and House, and that the agreed upon legislation could result in a change in the applicable pleading standards for certain litigation brought against rating agencies. According to our ratings criteria, we place ratings on CreditWatch when, in our view, there is a 50% chance or more of a rating change, and CreditWatch reviews can be the result of regulatory changes’ impact on an issuer’s business.

The agreed upon legislation contains a provision whereby investors may be able to sue rating agencies if they can show that the agency knowingly or recklessly failed to conduct a reasonable investigation of the factual elements relied upon by a credit rating agency’s rating methodology, or obtain a reasonable verification of those factual elements from independent third-party sources. While we believe it is likely that the new pleading standard will lead to an increase in litigation-related costs at Moody’s, whether the new pleading standard would potentially increase the likelihood of successful litigation against Moody’s will be determined in the future by the courts. Moody’s management has stated that it plans to adapt its business practices in an effort to partially offset any potential new litigation risks associated with the legislation. Nevertheless, we believe that Moody’s may face higher operating costs, lower margins, and increases in litigation-related event risk, which would likely increase its business risk (see discussion under Litigation in our Encyclopedia of Analytical Adjustments for Corporate Entities–part of our Corporate Ratings Criteria).

In addition, if the final legislation removes many or all references to nationally recognized statistical rating organizations (NRSROs) from federal regulations, it may reduce investor demand for ratings. While we believe the latter change is unlikely to meaningfully impair Moody’s business position over the near term, we plan to consider its long-term impact. As per our criteria, greater business risk and lower profitability would be key factors in a potential downward revision of our evaluation of Moody’s business profile or a potential rating downgrade. In addition, Moody’s business will likely undergo noticeable changes due to new global regulations and the U.S. legislation’s impact on industry risk, which are business risk considerations under our criteria.

While a potential weakening of Moody’s business profile is the driver for our CreditWatch listing, we will also consider the potential longer-term impact on the company’s financial profile (see our business and financial risk profile matrix under the Analytical Methodology section of our Corporate Ratings Criteria). The company currently has a strong financial profile, in our view, as demonstrated by good levels of profitability, a high level of conversion of its EBITDA generation to discretionary cash flow, low leverage, and high cash balances. At March 2010, Moody’s EBITDA margin was 46%, the company’s conversion of EBITDA to discretionary cash flow was 45%, our measure of total lease-adjusted debt to EBITDA was 2.0x, and cash balances were $504 million.

CreditWatch

We anticipate resolving the CreditWatch listing over the near term, following our review of the final legislation and its potential long-term impact on Moody’s business position. In the event of a rating downgrade, we do not anticipate the short-term rating would be lowered to below ‘A-2’. An affirmation of the current ‘A-1’ commercial paper rating would likely involve a conclusion that the final legislation and new global regulations would not increase risk to Moody’s business position.

Related by the Econotwist:

SEC To Take Action Against Moody’s

E.U. Prepared To Set Up Own Rating Agency

How To Create A 3 Trillion Dollar Bubble And Burst It

Fitch Gives EU Bailout Tripel-A Rating

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How To Create A 3 Trillion Dollar Bubble And Burst It

The U.S. Financial Crisis Inquiry Commission have released a preliminary report on its findings after investigating the rating agencies role in the financial crisis.  Inflated initial ratings, and later rapid downgrades, on mortgage‐related securities by the agencies have contributed to the financial crisis through a number of channels, the commission concludes.

“In total, $2.5 trillion worth of RMBS and $564 billion worth of CDOs have been downgraded since January 2007.”

Financial Crisis Inquiry Commission

In other words; the rating agencies have erased more than 3 trillion dollars from investors accounts by correcting their own initial mistakes, triggering the biggest financial crisis since the 1930’s. The preliminary report explains what happened and how, but leaves the questions on why open to more speculations.

April 20, 2007:

Moody’s issue a report stating:

“Barring cumulative losses well in excess of current expectations, we do not expect a material number of downgrades to bonds rated A or higher.”

July 10, 2007:

S&P announce that they are placing 612 subprime RMBS tranches issued in late 2005 through 2006 on watch for possible downgrade.

Moody’s followed by downgrading 399 tranches of 2006 vintage subprime RMBS and placing an additional 32 tranches on watch for possible downgrade.

The downgraded securities totaled $5.3 billion in value and constituted 1.3% of 2006 vintage first lien RMBS.

July 11, 2007:

Moody’s placed 184 tranches of CDOs backed primarily by RMBS, with original face value of approximately $5 billion, on watch for possible downgrade.

July 12, 2007:

S&P downgraded 498 of the 612 tranches it had placed on watch two days earlier. The majority of the tranches were rated BBB or lower, but 8 AAA rated tranches were included.

By the middle of 2008 over 90% of Baa tranches had been downgraded.

Downgrades of Aaa tranches of RMBS did not begin in earnest until the middle of 2008 and continued steadily until the middle of 2009, when they leveled off with about 80% of tranches downgraded.

“In total, $2.5 trillion worth of RMBS and $564 billion worth of CDOs have been downgraded since January 2007,” the Financial Crisis Inquiry Commission writes in their preliminary report.

Stupidity Or Manipulation?

There are only two possible explanations for the rating agencies handling of the credit derivatives:

1. They had no clue what so ever about what they were doing.

Or

2. They purposely tried to manipulate the market.

The commission don’t make any conclusive statements at this point, but the last word have definitely not been said in this matter.

But its beyond doubt that the rating mess was one of the main triggers behind today’s the financial crisis.

This is the report’s introduction:

The purpose of this preliminary staff report is to present background on the role that credit rating agencies (RAs) may have played in the financial crisis. Most subprime and Alt‐A mortgages were held in residential mortgage‐backed securities (RMBS), most of which were rated investment grade by one or more RA. Furthermore, collateralized debt obligations (CDOs), many of which held RMBS, were also rated by the RAs. Between 2000 and 2007, Moody’s rated $4.7 trillion in RMBS and $736 billion in CDOs. The sharp rise in mortgage defaults that began in 2006 ultimately led to the mass downgrading of RMBS and CDOs, many of which suffered principal impairments. Losses to investors and writedowns on these securities played a key role in the resulting financial crisis.

Inflated initial ratings on mortgage‐related securities by the RAs may have contributed to the financial crisis through a number of channels. First, inflated ratings may have enabled the issuance of more subprime mortgages and mortgage‐related securities by increasing investor demand for RMBS and CDOs. If fewer of these securities had been rated AAA, there may have been less demand for risky mortgages in the financial sector and consequently a smaller amount originated. Second, because regulatory capital requirements are based in part on the ratings of financial institutions’ assets, these inflated ratings may have led to greater risk‐adjusted leverage in the financial system. Had the ratings of mortgage‐related securities not been inflated, financial institutions would have had to hold more capital against them. On a related point, the ratings of mortgage‐related securities influenced which institutions held them. For example, had less subprime RMB been rated AAA, pension funds and depository institutions may have held less of them. Finally, the rapid downgrading of RMBS and CDOs beginning in July 2007 may have resulted in a shock to financial institutions that led to solvency and liquidity problems.

In addition, downgrades of monoline bond insurers such as Ambac and MBIA and other providers of credit protection such as AIG triggered collateral calls built into insurance and derivative contracts, exacerbating liquidity pressures at these already troubled firms. This led to ratings downgrades of the securities these firms insured, prompting increased capital requirements at the firms which held these securities and – in the case of money market mutual funds only permitted to hold highly rated assets – sales of assets into an already unstable market.

Here’s a copy of the report.

Enjoy!

Related by the Econotwist:

Spain Loses AAA Rating – Here’s The Full Report

European Banks: “Leman Times Ten”

Proposal For New Single European Bond

Fitch: Credit Markets Still Deteriorating

You Sue Me, I Sue You, Oh Peggy, Peggy Sue

Banks Face Multi-Hundred-Million Dollar Settlements

Killing My CDS Softly

E.U. Prepared To Set Up Own Rating Agency

SEC To Take Action Against Moody’s

ECB Makes Rating Agencies Irrelevant

Goldman’s Collateralized, Securitized And Synthesized Fraud

Fitch Expects More European Sovereign Downgrades

Moody’s Downgrade Ambac Debt, Deals will be Affected

AIG: What Did FED Bail Out and Why?

The Arab World – Downgraded

Michael Milken Warns Against Sovereign Debt

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