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S&P: AUSTERITY DOESN’T WORK IN EUROPE

S&P has cut Ireland’s sovereign debt rating to AA- from AA based on the continuing economic woes that have been magnified by their harsh austerity measures and foolish involvement in a single currency system:

  • 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.
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