Less than a week after downgrading Spain's credit rating, Moody's Investors Service warned it might cut Ireland's credit rating as well. Moody's said its decision to review Ireland's rating was prompted by the government's announcement last week that it was pledging more money -- as much as €50 billion -- to save the country's banks, as well as the weak economic recovery and rising borrowing costs.
"If Moody's decides to downgrade Ireland's ratings at the conclusion of the review," the agency said in a statement, "it would most likely be by one notch" from its current Aa2 rating. Moody's said it will finish its review within three months. If Moody's downgrades Ireland, it will be following in the footsteps of Standard & Poor's and Fitch Ratings, which have already cut the country's rating to AA-.
"Ireland's ability to preserve government financial strength faces increased uncertainty as a result of three main drivers, which together would further increase its debt and aggravate its debt affordability," Dietmar Hornung, Moody's lead sovereign analyst for Ireland said in a statement.
Moody's believes the measures to support the banks will lead to a substantial rise in Ireland's general government deficit to around 32% of GDP this year. As for its economic recovery, Moody's says that recently published data highlight Ireland's weak growth prospects. Moreover, austerity measures could further impact domestic demand and prolong a recovery. Meanwhile, Dublin's cost of borrowing is increasing, Moody's said.
Irish Finance Minister Brian Lenihan (pictured) said on Sept. 30 the cost of repairing the country's financial system may ultimately rise to about a third of gross domestic product, Bloomberg reports. Meanwhile, Ireland's central bank said Monday the economy will barely expand this year.
Ireland is set to unveil a four-year plan to stabilize public finances and bring the deficit below 3% of GDP by 2014. Moody's said the plan would be key to its review.