Investor Alert

Oct. 6, 2010, 9:07 a.m. EDT

Fitch downgrades Ireland, outlook negative

Bank recapitalization costs contribute to move, agency says

By William L. Watts, MarketWatch

LONDON (MarketWatch) — Fitch Ratings on Wednesday cut Ireland’s credit rating, citing the rising cost of bailing out the nation’s banking sector, and warned that a further downgrade may be in the offing if the economy fails to bounce back.

Fitch cut the Irish government’s credit rating to A from AA- and said the outlook on the rating is negative. A negative outlook implies there is more than a 50% chance of a further downgrade in the next 12 to 24 months, the agency said.

European Stocks Wait For U.S. Jobs

Bourses are looking ahead to more exciting events later in the week, although commodities and commodity stocks are bid as they might be among the beneficiaries of any more quantitative easing.

“The downgrade of Ireland reflects the exceptional and greater-than-expected fiscal cost associated with the government’s recapitalization of the Irish banks, especially Anglo Irish Bank,” said Chris Pryce, a director in Fitch’s sovereign group.

“The negative outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort,” he said.

In foreign-exchange trading, the euro /quotes/comstock/21o!x:seurusd (EURUSD 1.3983, +0.0009, +0.0644%)  erased a gain versus the U.S. dollar in the wake of the announcement but then rebounded. The single currency changed hands at $1.3862, up slightly from $1.3852 in North American trading late Tuesday. See more on trading in the dollar and rival currencies.

On Tuesday, Moody’s Investors Service put its Aa2 credit rating for Ireland under review for possible downgrade.

In Dublin, the government’s set to unveil a long-term fiscal plan for Ireland in November. It has said it intends to bring the budget deficit down to less than 3% of gross domestic product — the European Union’s limit — by 2014.

Excluding the cost of recapitalizing the banking sector, the deficit is forecast to top 12% of GDP this year. Including the recapitalization costs, the deficit is pegged at 32% of GDP.

Ireland’s central bank last week said the cost of bailing out nationalized lender Anglo Irish Bank could reach as much as 34.3 billion euros ($47.5 billion). That brings the total cost of recapitalizing the lender to €29.3 billion, although the total amount could rise by another €5 billion under a “stress scenario.”

The bank has already received €22.9 billion in capital after it was hamstrung by the collapse of Ireland’s property bubble. Including recapitalization measures for other banks, the industry bailout could total as much as €50 billion.

Against this backdrop, the central bank’s latest estimates of the recapitalization costs are plausible, Fitch said.

The agency also noted that a cash buffer of €20 billion would give Ireland considerable financial flexibility.

William L. Watts is a reporter for MarketWatch in London.

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