Moody’s cuts rating on Irish government debt amid worries over bank bailouts

Moody’s downgrades Irish government debt

LONDON — Ireland’s debt rating was downgraded by Moody’s on Thursday amid mounting worries about the country’s public finances and the cost of the government’s bailout of the banking system.

The New York-based agency said it had lowered its rating by one notch to AA1 from the top AAA level and warned that another downgrade was possible. Moody’s, which in April had put the country on warning of a possible downgrade, was the last of the big three ratings agencies to take the step.

“The pronounced weakness in economic activity has been translating into a severe deterioration of Ireland’s public finances, and the country is set to emerge from the current economic crisis with a considerably higher debt burden for the foreseeable future,” said Dietmar Hornung, a vice president at Moody’s.

Hornung said the government’s commitment to pump more than euro11 billion ($15.5 billion) into three Irish banks had worsened its own ballooning deficit, while its plans to buy up the banks’ defaulting debts and transfer them into a new state-owned “bad bank” could cost tens of billions more. Nonetheless, he said the government’s “strong balance sheet position prior to the crisis” meant the current credit downgrade should be modest.

Typically, credit downgrades raise the cost of borrowing, and traders on Thursday quickly began demanding higher rates on purchases of Irish government-underwritten bonds.

Moody’s was the last of the big three agencies to strip Ireland of its AAA rating. Standard & Poor’s twice has cut Ireland’s rating, most recently last month, while Fitch has already lowered its rating by one level and is mulling a second cut.