Yesterday Standard and Poors downgrafed Ireland’s credit rating one step down from AA to AA- with a continued negative outlook. Meaning further downgrades are quite possible in the next year.
S&P’s reasons for the downgrade were concerns that the cost of bailing out Ireland’s financial sector would continue to grow as it has done relentllessly so far. Only a week ago Ireland had to yet again inject more billions into AngloIrish Bank. S&P now estimates the cost of bailing out Ireland’s banks will be around €50 billion which is a big jump up from its previous estimate of €35 billion.
S&P also fears that the bad ‘assets’ being bought from the banks and put into Ireland’s ‘Bad Bank” will continue to lose whatever worth they have.
Ireland’s National Treasury Mangement Agency (NTMA), described S&P’s fears and estimates as” extreme”. John Corrigan the Chairman of NTMA said in the Irish Times today ,
“…the key issue is how you measure the NET debt and they have made no allowance whatsoever, they attribute no value whatsoever, for the assets which Nama are acquiring,” said Mr Corrigan (my empahsis). He went on to say, “To put this into perspective about 25 per cent of the underlying collateral in Nama relates to property in London. Is Standard & Poors seriously suggesting that such property is worth nothing?”
And there you have the crux of it. In a double dip, which we are most assuredly in, the worth of ‘assets’ dodgey enough for the banks holding them to want to sell to the state’s Bad Bank, are , without any doubt, going to lose more of their value. If they weren’t going to, the banks involved would be hanging on to those ‘assets’. But they’re not. They’re unloading them on to the tax payer. Who is not allowed to know what the State is paying for them nor what they might be worth in the market. All that is considered too sensitive to talk about. The Irish are being screwed.
I strongly suspect a large part of S&P’s real worry about Ireland’s banks, which they might be cautious about saying in pubilc, is not the debt and assets on the books of Irish banks, but those OFF their books. Ireland is sitting in a festering swamp of off-balance sheet Special Investment Vehicles holding swaps and derivatives of all kinds. None of them stable. Of course Ireland is not alone in this. London has a pit off them too. And so do Germany’s Landesbanks. But Ireland is the one in the spot light at the moment and has less ability to keep its head above the sludge in which it’s banks are drowning.
This down grade puts Ireland’s rating one above Italy’s, three above Portugal’s and seven above Greece’s. Of course I fully expect to see Portugal, Spain, Italy, Greece and Hungary all coming under pressure of their own downgrades in the near future. All of these countries are going to suffer as the unrealisitc growth estimates upon which their recovery and debt payment plans are based, all have to be revised down. If Ireland’s growth prospects are dimming none of the others will fare any better.
As growth slows, debts grow as paying them off becomes harder.