LONDON, Nov 26, (Agencies): Rating agency Standard & Poor’s lowered the credit standing on four big Irish banks on Friday, saying they were struggling to obtain interbank finance despite backing from the government, now supported by an EU-IMF rescue.
It also warned of ripple effects on some banks based in Northern Ireland and one with links to London. The four Irish banks are Allied Irish Banks Plc (AIB), Bank of Ireland (BOI) and Irish Life and Permanent Plc (IL&P), downgraded by one notch, and Anglo Irish Bank Corp Ltd downgraded by six notches
The action on Anglo Irish Bank was “because we believe that the Irish government may be forced to reconsider its current supportive stance towards Anglo’s unguaranteed debt.”
The downgrades applied to long-term counterparty ratings of the four domestically owned Irish banks, but the agency also lowered the credit rating of Barclays Bank Ireland Plc (BBI) by one notch.
It put on watch with negative implications the ratings of Ulster Bank Ireland Ltd, its UK parent Ulster Bank Ltd, and KBC Bank Ireland Plc.
This meant that “we may take rating action in the event that the sovereign rating is lowered further.”
S and P said these decisions “follow a turbulent period for the Irish banking system, which in our view has led to the fortunes of the Irish sovereign (debt) becoming increasingly entwined with those of its banking system.”
It said: “In recent months, we saw that the domestically owned Irish banks have struggled to source term funding, even when government guaranteed.
“We also observed that the banks have also suffered significant deposit outflows from institutional clients and become highly reliant on central bank funding.”
The return to profitability for these banks was likely to be harder than the agency had expected.
The agency said that it understood that the European Union-IMF rescue for Ireland, agreed in principle last weekend and expected to be tied up this weekend, would direct support to “significantly improving the capitalisation of the most systemically important Irish banks.”
This “may eventually succeed” in shoring up “lack of confidence in the system” but AIB, BOI and ILP faced a long haul in weanining themselves off support, S and P said.
Meanwhile, yields on Ireland’s bonds reached a new euro-era high Friday as investors dumped the nation’s debt securities, and Irish bank shares also kept falling in expectation the banks are heading toward greater state ownership. Analysts said Ireland’s bonds and banks are getting battered because deep skepticism remains that an international bailout loan — whose details are expected to be unveiled Sunday — will be enough for Ireland to resolve its debts.
Speculative media reports in Dublin and Brussels fueled nervousness, with claims that the International Monetary Fund and European Central Bank experts driving the loan talks in Dublin would like to make Ireland’s senior bondholders — chiefly foreign banks — eat losses in Ireland’s debt-crippled banks. The IMF and European officials made no official comment on the topic.
The Irish Times said an agreement on an 85 billion euros ($112.5 billion) IMF-EU loan for Ireland could be announced Sunday, one week after Ireland formally applied for a financial rescue. It would be used as a credit line by Ireland’s government and banks, which both have been priced out of the bond markets.
Analysts say any effort to make bondholders share the bailout burden will roil markets further and risk driving up the borrowing costs of even the world’s most credit-worthy nations.
The bonds of Allied Irish Banks and Bank of Ireland were particularly hard hit by Friday’s speculation, quickly losing between 5 percent and 10 percent of their already weakened value.
Mark Ostwald, strategist at Monument Securities in London, said any effort to draw senior bondholders into the Irish bailout bill would set “a nasty, if situationally understandable, precedent.”
Until now, Ireland has stressed that its financial laws give 100 percent protection to senior bondholders, just like depositors.
Ireland’s embattled government conceded defeat Friday in a key by-election, cutting its already slim majority in parliament as it battles to finalise an international bailout for the debt-laden country.
As EU heavyweights Germany and France urged a rapid conclusion to talks on assistance for Ireland worth 85 billion euros ($114 billion), it appeared possible that an announcement would be made Sunday.
Defeat for Prime Minister Brian Cowen’s Fianna Fail party in the by-election in Donegal, northwest Ireland, added to the pressure on his beleaguered coalition government to take the country to the polls.
Deputy Prime Minister Mary Coughlan said it was “quite obvious” that the candidate for the nationalist Sinn Fein party had won the seat, meaning the government would be left with just a two-seat margin in parliament.
The constituency was previously a stronghold for Fianna Fail and Coughlan admitted: “When it comes to a general election, yes, we are going to have a tough fight. It is a very difficult time.”
The government was also preparing for tens of thousands of demonstrators to take to the streets of Dublin on Saturday in protest at a draconian set of measures to reduce the one-time economic Celtic Tiger’s massive deficit.
“People need to show there is an alternative. It is important they show how they feel about a plan that will increase unemployment,” Macdara Doyle, spokesman for the Irish Congress of Trade Unions, told AFP.
The austerity plan announced Wednesday will cut the minimum wage and slash 25,000 public sector jobs, as Ireland strives to bring its deficit back under three percent of gross domestic product from its current level of 32 percent.
Jack O’Connor, president of SIPTU, Ireland’s biggest union, said fears that the demonstration could become violent would not prevent its members from turning out.
“There’s an attempt at scaremongering to dissuade people from participating but I’m not worried about violence,” he said.
Meanwhile, German Chancellor Angela Merkel and French President Nicolas Sarkozy united to push forward the talks on the Irish bailout amid fears of contagion spreading throughout the eurozone.
The two leaders spoke Thursday and “agreed that negotiations with the Irish government must be rapidly concluded,” Merkel’s press office said.