Ireland’s five main banks fall into junk category, authorities say economy “on track”
Ratings agency Moody’s has cut the rating of Ireland’s five main banks to junk status, mirroring its downgrade of the sovereign’s debt, while European authorities are attempting to assuage onlookers Ireland’s economy is on the mend.
Allied Irish Banks (AIB), Anglo Irish Bank (Anglo Irish), Bank of Ireland (BoI), EBS (EBS) and Irish Life & Permanent (IL&P) all had their debt dropped from Baa3 to Ba1 following a downgrade to Irish government debt a day earlier. That collective bank debt was guaranteed by Ireland’s government during the financial crisis.
Moody’s issued a warning that removal of the government guarantee could prompt further downgrades of the five banks’ debt.
“If the credit risk for unguaranteed senior unsecured debt was to increase-either because of further economic decline or because of policy changes implying a greater willingness to impose losses on bondholders-then the banks’ unguaranteed senior unsecured debt ratings would likely face further downgrades,” it said in a note.
On the same day the ECB, EC and IMF issued a more positive assessment of Ireland’s economy and banking sector, following a monthly visit by representatives from those organisations. “The teams’ assessment is that the programme remains on track and is well financed,” a statement said.
“Renewal of the boards and management of banks is underway, the recapitalisation of domestically owned banks is expected be completed by end July, with the fiscal cost reduced by burdensharing with subordinated debt holders,” it added.
Due to the implication losses are likely to be imposed on bondholders, Moody’s was asked whether the move means debt held by the five Irish banks is likely to be assessed again with a view to rerating. The ratings agency did not reply immediately.
An upgrade to the five main Irish banks’ debt is unlikely in the foreseeable future, suggested the ratings agency. “Moody’s sees little likelihood of upward rating pressure emerging on the ratings due to the still very challenging economic conditions in Ireland.
Improvements in the banks’ funding profiles, permitting a substantial reduction in the reliance on central bank funding, would be a prior condition for any potential upgrade,” it said.
It emerged the five banks downgraded on Thursday collectively needed an additional €24bn of funding at the end of March.
Efforts have since been made to sell off some assets of those banks, although so far those have only been overseas-with AIB reducing its foreign interests.
BoI’s securities services business was sold to Northern Trust, and its asset management business acquired by State Street earlier in the year, prior to the announcement on the extent of the bank’s funding shortfall.
On 1 July AIB acquired EBS, in a planned move declared by the Irish government in March aimed at restructuring the country’s banking sector.
Anglo Irish and Irish Nationwide Building Society were also merged, bringing to an end 138 years of INBS operating as a sole financial institution. The two banks are being renamed to Irish Bank Resolution Corporation, with the aim of winding it down in 10 years.