Standard & Poor's Ratings Services has downgraded Irish government bonds by one notch, citing the high costs of supporting the nation's troubled financial system.
The ratings agency said the rising costs will "further weaken the government's fiscal flexibility over the medium term." Analyst Trevor Cullinan said a recent injection of new funds into Anglo Irish Bank Corp. Ltd. helped lift projections that the Republic of Ireland's net general government debt will rise to near 113 percent of the nation's gross domestic product in 2012. That's more than one-and-a-half times the median for the average of countries in the European Union, and well above projections for Belgium and Spain, S&P said.
S&P cut the government's long-term sovereign credit rating to "AA-" from "AA." The outlook is negative.
Ireland was hit hard by the global financial crisis as a collapse in the property market nearly took down the banking system.
S&P called the Irish government's moves to deal with the financial sector's difficulties "proactive and transparent," and said they should help the economy recover. But they will result in an increasing financial burden that will be slow to unwind. S&P raised its forecast for the costs of propping up the banking system to 90 billion euros (about $114 billion) from 80 billion euros ($101.5 billion.)
The nation's short-term rating was kept at "A1+."
The negative outlook reflects S&P's view that the rating could be lowered again if the government's fiscal performance improves more slowly than currently expected, said Cullinan. It could be upgraded to stable if the government can reach its target for reducing its deficit or if the banking sector stabilizes more quickly than expected and the government has to spend less to support it.
Moody's Ratings similarly downgraded the nation's bonds last month.
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