By: Dr. Mike Campbell

The Irish financial sector was left in a big mess following on from the financial crisis and required the Irish state to bail it out to prevent the system from disintegrating. Now, ratings agency Standard and Poor’s (S&P) has downgraded the credit worthiness of Irish debt vehicles from AA to AA-; the nation’s lowest rating since 1995. The move signals S&P’s belief that the chance of a default on Irish government bonds has increased appreciably. However the AA- ranking still means that the agency believes that the Irish state has "a very strong capacity to meet (its) financial commitments". But the move is likely to force the interest rate that the Irish have to offer to attract investors to their bond issues will rise.

S&P has justified the move on the basis that governmental support to the still ailing financial sector will place a strain on government finances. They claim that a further €90 billion will be needed to support the financial sector; €10 billion more than previously estimated. They also believe that the total Irish debt will escalate from 64% of GDP to113% which would mean that the Irish Republic would be one of the most indebted members of the Eurozone.

The Irish ratings agency has characterised the assessment as “flawed”, claiming that the scenario used was “extreme and unrealistic” being based on the idea that the government would need to recapitalise banks (none of which failed the recent EU stress test) and based on questionable calculations. The spat is likely to reinvigorate the debate over the role of a private company in evaluating the credit worthiness of a sovereign state. The EU is poised to bring in restrictions on the activities of credit ratings agencies within the EU later this year.