/> CREDIT ratings agency Moody’s slashed its ratings on Anglo Irish Bank’s lower-grade debt yesterday, unnerving investors as Dublin tots up the final cost of rescuing a lender whose soured loans have crippled the country’s economy.
Yields on 10-year government bonds increased to 430 points above the equivalent German securities as investors fretted over a writedown of debt.
Moody’s cut the nationalised bank’s senior unsecured debt by three notches to Baa3 –
just one notch above junk status -- citing a small risk the government would not continue to support that class of debt, the agency said. It slashed Anglo Irish’s subordinated debt by six notches to Caa1.
The steadily mounting scale of the bank’s rescue has put massive pressure on already strained public finances, propelling the former “Celtic Tiger” economy to the forefront of investor concerns about the sustainability of sovereign debt in the Eurozone.
The government has previously indicated the bailout of Anglo Irish will cost around €25bn (£21.3bn), although Standard & Poor’s has estimated it could be as high as €35bn.
Finance minister Brian Lenihan has said it is unthinkable that Ireland would default on senior debt but, in the absence of such assurances given on subordinated paper, analysts say those might face a buyback at well below par.
“Anglo Irish is the millstone around our necks,” says Bill Blain, a fixed income trader at Matrix in London.
Meanwhile, in another part of the fragile Eurozone area, the OECD recommended that Portugal swiftly consolidate public finances to restore investor confidence and stand ready to raise value-added and property taxes if necessary. The OECD warned that the country’s high sovereign debt spreads could put recovery at risk, and urged labour market reforms to boost competitiveness. “I am confident Portugal will weather this crisis,” OECD Secretary-General Angel Gurria said.
The OECD’s warning came as the Financial Stability Board said yesterday that the global financial system remains vulnerable because of continuing fiscal tensions in developed economies and fragile banks, and warned that these risks could be amplified by weakening economic conditions. “The potential for adverse feedback loops between weak economies, fragile banking systems and fiscal strains remain significant,” it said.