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PRESS RELEASE: Moody's Downgrades Ireland To Aa2, Stable Outlook

Mon, 19th Jul 2010 07:13

The following is a press release from Moody's Investors Service: Frankfurt, July 19, 2010 -- Moody's Investors Service has today downgraded Ireland's government bond ratings to Aa2 from Aa1. The main drivers for the downgrade are: 1. The government's gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability (as represented by interest payment to government revenue). 2. Ireland's weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit. 3. The crystallization of contingent liabilities from the banking system, as represented by a series of recapitalization measures and the need to create the National Asset Management Agency (NAMA), a government-created special purpose vehicle that is acquiring impaired loans from banks. Moody's has changed the outlook on the ratings of the government of Ireland to stable from negative as the rating agency now views the upside and downside risks as being evenly balanced at the current rating level. Moody's has also affirmed Ireland's short-term issuer rating of Prime-1 with a stable outlook. Ireland falls under the Eurozone's Aaa regional ceilings for bonds and bank deposits, which are unaffected by the Irish government's downgrade. Moody's has also downgraded to Aa2/stable outlook from Aa1/negative outlook the rating of Ireland's National Asset Management Agency (NAMA), whose debt is fully and unconditionally guaranteed by the government of Ireland. RATIONALE FOR DOWNGRADE "Today's downgrade is primarily driven by the Irish government's gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability," says Dietmar Hornung, a Moody's Vice President -- Senior Credit Officer and lead analyst for Ireland. The country has suffered a dramatic contraction in GDP since 2008, causing a sharp decline in tax revenue. The general government debt-to-GDP ratio rose from 25% before the crisis to 64% by the end of 2009, and is continuing to grow. Moody's also expects economic growth to be below historical trend over the next three to five years for two reasons. Firstly, banking and real estate -- the engines of Ireland's growth in the years preceding the crisis -- will not contribute meaningfully to overall growth in the coming years. Secondly, the fall in private sector credit is dampening the growth outlook. The ongoing credit contraction reflects both (i) the tightening in credit supply, due to balance sheet constraints among lenders; as well as (ii) the weak demand for credit as a consequence of a broad de-leveraging process in which the household sector is seeking to repair its balance sheets through increased savings (or reduced dissavings). The third key factor driving Moody's rating action is the crystallization of contingent liabilities from the banking system as a result of the government taking on debt to provide support to the country's ailing banks. Overall, the recapitalization measures announced to date could reach almost EUR25 billion (equivalent to15.3% of Ireland's 2009 GDP) -- and Moody's expects that Anglo Irish Bank may need further support. In addition, the government created NAMA, a special purpose-vehicle that is acquiring loans from participating banks at a discount in exchange for government-guaranteed securities. While we do not expect the government -- not even in a moderately stressed scenario -- to incur permanent losses in excess of 25% of the country's 2009 GDP as a result of these obligations, we believe that the uncertainty surrounding final losses would exert additional pressure on the government's financial strength. While Moody's expects the near-term deterioration in the government's debt metrics to be severe, the rating agency nevertheless expects the general government debt-to-GDP ratio to stabilize at 95% to 100% over the next two to three years. Given Ireland's wealthy and flexible economy and its very high institutional strength, these debt levels are commensurate with a Aa2 rating. Ireland's demonstrated adjustment capability and its economic vitality -- reflected for instance in its ability to attract foreign direct investment -- are important characteristics that support the rating. RATIONALE FOR STABLE OUTLOOK At the Aa2 rating level, the upside and downside risks are evenly balanced. "If the GDP growth trend were to exceed Moody's expectations -- with a quick resumption of domestic credit flow and a supportive global economic environment -- then the government's debt metrics could stabilize earlier than is currently being assumed," says Mr. Hornung. On the other hand, Moody's notes that the country could experience downward rating pressure in the event of (i) a failure of the economy to rebound in a meaningful way; and/or (ii) a severe deterioration in the country's debt metrics triggered by a further crystallization of bank contingent liabilities beyond Moody's current expectations. For further information, please refer to Moody's Special Comment entitled "Key Drivers of Ireland's Downgrade to Aa2," which is available on www.moodys.com. PREVIOUS RATING ACTION & METHODOLOGY Moody's last rating action affecting Ireland was implemented on 2 July 2009, when the rating agency downgraded Ireland's government bond ratings to Aa1 and assigned a negative outlook. Prior to that, Moody's last rating action on Ireland was taken on 17 April 2009 when the rating agency placed the government bond ratings on review for possible downgrade. Moody's last rating action affecting NAMA was implemented on 16 June 2010, when the rating agency assigned an initial rating of Aa1 with a negative outlook to the senior unsecured debt issued by NAMA, which is backed by a full guarantee from the Irish government. The principal methodology used in rating the government of Ireland and NAMA is "Moody's Sovereign Bond Methodology", which was published in 2008 and can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website. Copyright 2010 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved. CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S ("MIS") CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from reliable sources; however, MOODY'S does not and cannot in every instance independently verify, audit or validate information received in the rating process. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each

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July 19, 2010 02:13 ET (06:13 GMT)

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