Rating agency Standard & Poor's has today cut Ireland's credit rating to A-/A-2 from A/A-1. It said it was keeping a negative outlook on the country amid uncertainty over how much additional capital the Irish banks will need.
It also lowered its assessment of Ireland's banking system, dropping Ireland from group 4 to group 6, which puts it in the same category as Turkey, Estonia and Cyprus. S&P also lowered its credit rating for four Irish banks - AIB, Bank of Ireland, Anglo Irish Bank and IL&P.
S&P said it would be able to reassess Ireland's rating by April when the Central Bank will have completed a review of the banks' liquidity and capital requirements. It added that it expected Ireland to retain an investment-grade rating.
'We estimate the external indebtedness of Ireland's domestic banking groups at over 170% of GDP,' said analyst Frank Gill. He added that Irish domestic banks currently depended almost entirely on the ECB to refinance expiring market debt.
'Were the labour market to deteriorate further, a rise in the level of delinquencies in the domestic banks' mortgage books could result in higher new capital requirements than we presently assume,' he said.
S&P also said the emergence of a European sovereign debt restructuring framework that could reduce the perceived adverse political and financial cost of a sovereign debt restructuring could also lead it to reconsider our view of Ireland's creditworthiness.
Its Banking Industry Country Risk Assessment (BICRA) rankings assess its view of the strengths and weaknesses of a country's banking system compared with those of other countries. The scale ranges from Group 1 (strongest) to Group 10 (weakest).
'We consider the decline in creditworthiness of the Irish banking system over the past three years, and the related collapse in investor confidence, to be one of the most severe that we have observed in a major developed economy for many years,' S&P said.
S&P said it had made the decision on the banks because of the prospect that the economic recovery would likely be 'later, weaker, and more uncertain' than it previously expected. S&P said it also expected weak earnings prospects for the domestic banks, and said weak investor confidence had led to significant deposit outflows and restricted funding options for the banks.
Bank of Ireland's new bond exchange plan
Bank of Ireland has announced plans to strengthen its financial position by exchanging some of its subordinated bonds for new Government-guaranteed bonds.
There is currently around €300m of the bonds - originally issued in Canadian dollars - outstanding. The bank will exchange the existing notes for new notes valued at between 52% and 59% of the original notes. This means that if all bondholders took up the offer, the bank would add around €140m to its capital base.
In December, Bank of Ireland raised €700m in capital through an exchange of some of its subordinated bonds for new bonds. This went towards meeting a target of raising an additional €2.2 billion by the end of this month to meet new targets set by the Central Bank.
