Fitch strips Ireland of top credit rating 

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Fitch Ratings has stripped Ireland of its top AAA credit rating, and the government warned it could end up with majority stakes in the country's lenders.

Fitch cut Ireland's AAA ratings by one level to AA-plus, the second highest, citing a severe economic downturn taking a "heavy toll" on public finances. Fitch also said it holds a negative outlook for Ireland, suggesting more cuts may come.
 
"The outlook for Ireland's public finances and fiscal risks is no longer consistent with an 'AAA' rating," Fitch said in a statement.

Dublin is launching the first nationwide "bad bank" plan in Europe since the start of the credit crisis, which it says could lead to additional capital injections into the two top banks - Allied Irish Banks and Bank of Ireland.

After an earlier injection of 3.5 billion euros in preference shares into each of the two lenders, the state could end up taking direct majority stakes, though it wants to avoid complete nationalisation and has no plans to delist them, Finance Minister Brian Lenihan said.

The plan to set up a National Asset Management Agency to take risky property loans with a book value of 80 billion to 90 billion euros off the balance sheets of its banks puts taxpayers' interests in front of bank investors, who face dilution, Lenihan's advisor said.

"The proposal I put forward and found favour with the government involves shareholders taking considerable pain," said the adviser, Peter Bacon, whose report formed the foundation of the government's plan to set up an agency to manage banks' risky assets.

The new agency would acquire the loans - including the entire land and development portfolio of the banks - at a substantial discount to book value and these write-downs could make a further state bailout necessary.

The state would pay for the assets by issuing government bonds, likely leading to a major jump in the national debt.

But a downgrade from Fitch following a similar move by Standard & Poor's will raise the cost of borrowing additional funds overseas.

Fitch said in its statement that Ireland's GDP is expected to decline by 8% in 2009, and government revenues may fall by 16%, following similar declines in 2008.

The yield on Irish 10-year bonds rose to 5.35% compared with 5.31% in early afternoon trade.

"We had AAA. Today they brought their rating to AA-plus," John Corrigan, director of Ireland's national pension fund, told reporters.

Blow to the reputation

The issuance of 50 billion euros of bonds for the bank scheme would take general government debt to 88% of gross domestic product this year and 107% in 2011, the National Treasury Management Agency said in a statement.

That compares with the 59% debt/GDP ratio already envisaged for 2009 by the government.

The agency said the 50 billion euro figure was just an example for illustrative purposes. However, analysts have said the amount could well be above 40 billion euros.

The bank plan partly overshadowed spending cuts and tax hikes unveiled in an emergency budget on Tuesday to tackle the worst public finances in Europe and allay investor concerns that the former "Celtic Tiger" economy was a threat to euro zone stability.

"Ireland has suffered a blow to her reputation abroad and that must be fixed and it will be fixed," Prime Minister Brian Cowen told a parliamentary debate on Wednesday. "The pain will not last forever."

The European Union's executive arm said Dublin had taken "decisive, broad-based action" to bring the deficit below an EU limit of 3% by 2013.

But investors focused more on dire predictions for this year's recession and the potential cost of dealing with the legacy of a burst property bubble, which has accelerated Ireland's transformation to one of Europe's worst performers with an expected GDP contraction this year of 7.7%.

Shares in Bank of Ireland and Allied Irish Banks, which had doubled in value ahead of Tuesday's budget, plunged over 30% in the morning but Bank of Ireland later retraced some ground to end down 7%.

A Moody's downgrade on 12 Irish banks further hammered sentiment, but in one positive note, yields in a Treasury Bill auction this year fell from last month's auction.

Cowen won cautious praise from economists for facing up to the scale of Ireland's problem in the emergency budget but they expressed disappointment that more effort was not taken to cut spending this year.

Even with drastic measures, including doubling and extending an income levy, Ireland will still have a budget deficit of 10.75% of GDP, easily the worst in Europe, this year and next.