Dublin’s decision to defer previously agreed recapitalization of banks until elections are over in the country later this month, has prompted Moody’s to downgrade the country’s banks ratings to junk status.
The cut in rating means that the unsecured and unguaranteed bonds at the country’s six banks are below investment grade or junk. Standard and Poor’s has already cut the country’s banks’ ratings last week.
After the downgrading, Moody’s said the recent announcement “call into question the government’s willingness to provide additional support to the banks beyond that which has already been provided to date, and reflect the increasing risk of some type of burden-sharing with senior creditors”.
Moody’s said it was concerned by the “huge fiscal burden faced by Irish taxpayers” due to the bank bailouts. There was an “increasing risk that this burden could be shared not only by subordinated creditors but by senior creditors, most likely through distressed exchanges”.
Criticising the government’s recent move of deferring bank recapitalization, Moody’s said the government’ intention “has become far less certain and more difficult to predict, resulting in a significant lowering of our support assumptions for all domestic Irish banks and the subsequent downgrades of the unguaranteed senior unsecured debt ratings”.
In recent times, both opposition parties of the country have argued that senior bondholders not covered by the 2008 state guarantee will have to share the cost of bail-out packages to the banks, which has already reached €34.7 billion.
The country’s current finance minister, Brian Lenihan in a surprise move refused to provide additional capital of €7 billion to Bank of Ireland, EBS Building Society and Allied Irish Bank as promised earlier, stating that being a minority government it does not have the mandate and are leaving the decision to the incoming administration.
Ireland had secured a €85 billion bailout package from the European Union and IMF, including a €35 billion bank bailout package, since the EU was more worried about containing the debt crisis from spreading. The European Central Bank had ruled out any such move then fearing its effect on other eurozone borrowers. However, the ECB may think again since circumstances in Ireland have changed.