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Business

Irish debt dramatically downgraded despite EU rescue fund deal

Moody's ratings agency has slashed its credit rating for Ireland by five notches. The drastic downgrade hardly shows confidence in ongoing EU efforts to safeguard the euro at the Brussels summit.

Part of an Irish one-euro coin, visible against a blank backdrop

Ireland's international obligations just got a little larger

Ratings agency Moody's on Friday dropped its rating on Irish sovereign debt by five notches, suggesting it was less than enthused by Thursday's EU agreement on a permanent stability fund to protect debt-laden single currency users.

Moody's dropped Ireland down five spots, from the third-highest available grade, Aa2, to Baa1, a risk level described as "lower medium grade." However, the agency added that this rating represented a "negative" outlook for a country, which would ordinarily have a very high credit rating.

Moody's said its decision was based "on the risk that the Irish government's financial strength could decline further if economic growth were to be weaker than currently projected or the costs of stabilizing the banking system turn out to be higher than currently forecast."

European leaders gathered at a summit in Brussels were seeking to shore up debt-laden eurozone countries, and the single European currency more generally; but the measures agreed on Thursday evidently did little to impress Moody's. The establishment of a permanent rescue mechanism for eurozone members was designed, at least in part, to dispel concerns in the markets that Europe may never repay its debts.

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"Moody's has this morning become the third of the three major ratings agencies to downgrade Irish sovereign debt in the past four weeks," the chief economist for Dublin-based Goodbody Stockbroker's, Dermot O'Leary said. "It has, however, outdone the other two with the scale of the downgrade."

Moody's move follows similar, but smaller, reductions by fellow credit agencies, Standard and Poor's and Fitch.

The change means that investors will now demand a higher return in exchange for purchasing government bonds, effectively upping the price of existing and future loans for the Irish government.

Ireland recently became the second eurozone country, after Greece, to seek emergency loans worth roughly 85 billion euros ($113 billion) from the European Union and the International Monetary Fund. The country's rising national debt and enormous 2010 budget deficit - boosted by a government bailout of the country's biggest moneylender, Anglo Irish Bank - forced the government in Dublin to call for help.

The financial turmoil has brought Prime Minister Brian Cowen's coalition government to its knees, a snap election is expected early next year.

Author: Mark Hallam (AFP, Reuters)
Editor: Chuck Penfold

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