MercoPress. South Atlantic News Agency

Moody’s cuts Ireland’s credit rating; warns of slow recovery

Finance minister Martin Mansergh: “nothing new”

Risk rating agency Moody’s cut on Monday Ireland's credit rating, warning the country faces a slow climb out of recession as the cost of a rescue of its banking sector mounts.

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.

“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, said 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% of GDP, the highest in Europe, which could rise to 20% or more this year, the state-funded Economic and Social Research Institute (ESRI) said last week.

With Ireland emerged from the Euro zone's longest running recession in the first quarter, Moody's said it expected Irish medium-term economic growth of 2-3% per year, below the 4% projection built into the government's fiscal program.

Moody's said 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,” said Martin Mansergh, Ireland's minister of state for finance. “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% of GDP by 2014, also citing threats to Ireland's growth target.