Ready for another bailout of Ireland? Moody's is.
The rating agency slashed Ireland's ratings to junk Tuesday, just three months after its last downgrade of the debt-soaked former Celtic Tiger. Moody's warned that Ireland isn't likely to be able to raise funds in the bond market after its current bailout loan expires at the end of 2013.
Ireland, laid low by its decision to bail out its reckless, feckless banks, took 85 billion euros ($122 billion) in aid last fall from the European Union and International Monetary Fund, promising to whip its flagging economy back into shape.
But digging yourself out of a giant hole isn't easy. With 10-year Irish government bonds yielding the low, low rate of 14% in recent trading, Ireland "is likely to need further rounds of official financing before it can return to the private market," Moody's said.
The downgrade comes after a wild two weeks in which Europe's debt crisis, long centered in weaker economies such as Ireland, Portugal and Greece, has moved into the supposedly more robust states of Spain andItaly. The sovereign debt selloff comes as European leaders tiptoe toward a plan to allow Greece to default on some of its bonds in a bid to reduce its debt load and stay out of the abyss.
Moody's said it is becoming clear that such creditor haircuts are going to be part of any future aid package – which isn't going to make it any easier for the weaker countries to raise money from investors in the foreseeable future.
Moody's assumption surrounding increased private sector creditor participation is driven by EU policymakers' increasingly clear preference -- as expressed during the negotiations over the refinancing of Greek debt -- for requiring some level of private sector participation given that private investors continue to hold the majority of outstanding debt. A call for private sector participation in the current round of financing for Greece signals that such pressure is likely to be felt during all future rounds of official financing for other distressed sovereigns, including Ba2-rated Portugal (as Moody's recently stated) as well as Ireland.
The good news, such as it is, is that Ireland is still in much better shape than Greece. That's not saying much, because at last look the credit markets were saying a Greek default has an 8 in 9 chance of happening within five years.
And if Greece does run off the rails in spite of official efforts to prop it up, Ireland could find itself in deeper trouble as well.
Although Ireland's Ba1 rating indicates a much lower risk of restructuring than Greece's Caa1 rating, the increased possibility of private sector participation has the effect of further discouraging future private sector lending and increases the likelihood that Ireland will be unable to regain market access on sustainable terms in the near future. This in turn implies that some Irish government bond investors would need to absorb losses. The increased risk of a disorderly and outright payment default or of a disorderly debt restructuring by Greece also increases the risk that Ireland will be unable to regain access to private sector credit.
Moody's kept its outlook on Ireland negative, meaning it could downgrade again if the government misses its cost-cutting targets or if the market gets even more unruly. At the current rate, that could be next week.
Greece and its patrons took a half-step forward Thursday, leaving just a few hundred billion more to go.
Greek leaders reached an agreement with the European Union and the International Monetary Fund on another round of tax hikes and spending cuts, Reuters reported.
The deal was taken as a positive on a day otherwise dominated by the sinking prospects for U.S. growth and policymakers' latest act of desperation, the release of oil MOREColin Barr - Jun 23, 2011 4:50 PM ET
In the echoes-of-2008 department, the World Bank just hired a former Lehman Brothers risk manager to run its finances.
The bank, which lends money to developing countries in a bid to curb poverty, said Madelyn Antoncic will "be responsible for maintaining the World Bank's high standing in financial markets."
It is tempting here to make a joke about Antoncic's qualifications for that task. After all, you could hardly have a lower standing in MOREColin Barr - Jun 23, 2011 1:26 PM ET
If you think our employment problem is bad now, consider this: the U.S. economy is on course for both a job shortage and a worker shortage.
So says McKinsey, the consultancy that just released a report on projected American job creation over the next decade. As you might expect, the outlook is not all that rosy.
A return to full employment, defined as 5% joblessness, "will occur in only the most optimistic job growth scenario," MOREColin Barr - Jun 23, 2011 11:50 AM ET
A Greek default would deliver a "very small" hit to U.S. banks, Fed chief Ben Bernanke said Thursday.
Bernanke, speaking in Washington at a Federal Reserve press conference, said the central bank has been "doing all we can to monitor the situation" in Greece, where the markets have been acting as if a default by the cash-strapped country is inevitable.
A Greek default would be the biggest global financial shock since the fall of MOREColin Barr - Jun 22, 2011 3:04 PM ET
You could knock Europe's banks over with a feather.
Financial institutions across the Continent share a terrifying trait with Lehman Brothers before its 2008 collapse: they rely too much on borrowed money, especially the cheap, short-term loans that are vulnerable to a market shock.
That's not exactly a handy characteristic when a Greek default seems almost inevitable. European policymakers this weekend failed to agree to terms on a 12 billion-euro ($17 MOREColin Barr - Jun 20, 2011 6:30 AM ET
A whole day without European debt fireworks is too much to ask for, apparently.
Moody's said Friday that it may downgrade Italy's debt, thanks to "fragile market sentiment" for deeply indebted European governments. It is the first downgrade warning for one of the stronger European economies since the Greek debt crisis flared up this spring.
The rating agency said that as investors grow more risk averse, Italy -- currently rated Aa2, the second-highest rating -- MOREColin Barr - Jun 17, 2011 3:47 PM ET
Europe is taking a deep breath Friday, which is good because there is still a lot of heavy lifting to do on its debt crisis.
Markets rallied after Germany backed off its demand that the next Greek bailout include mandatory concessions from the private sector lenders who financed Greece's descent into the sovereign debt swamp.
The deal means that European policymakers are now counting on bankers to voluntarily roll over their loans to Greece, MOREColin Barr - Jun 17, 2011 12:03 PM ET
Greece is in the soup. Are we about to get scalded with the spillover?
The odds say no, thanks to official support for Greece and the European banks that look most apt to suffer in a default. Yet it's clear that the U.S. financial system remains vulnerable to trans-Atlantic aftershocks.
One pathway that could wash Greek problems onto these shores is Europe's wholesale bank funding market, which relies in large part on MOREColin Barr - Jun 16, 2011 1:14 PM ET
The flight to safety trade is alive and well, for now.
The dollar and Treasury bonds rallied Wednesday after Greece's prime minister offered to resign. His resignation would mark the third fall of a bailout country government in recent months, after the collapse of Ireland's governing party last fall and the demise of Portugal's ruling group this spring.
The yield on the 10-year Treasury note plunged to 2.97% from 3.09% at the MOREColin Barr - Jun 15, 2011 1:02 PM ET
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