Ireland's credit score cut as fears grow over economic recovery

Ratings agency Moody's cut Ireland's credit score to Baa3 - one level above junk-bond status - and warned the nation could struggle to cut its deficit because of weaker-than-expected economic growth.

Moody's issued its latest downgrade hours ahead of the Irish government's expected announcement of a revised agreement with the European Commission, European Central Bank and International Monetary Fund on terms of Ireland's bailout agreement.

The lenders were expected to offer Ireland's new government a few concessions, including the reversal of a recent minimum-wage cut, but emphasize that Ireland must slash spending severely to qualify for continued funding.

The November bailout pact offered Ireland a potential credit line of 67.5 billion ($98 billion) on condition that Ireland remains on course to slash its annual deficits to 3% of gross domestic product by 2015.

Ireland's 2010 deficit soared to a modern European record of 32% because of exceptional bank-bailout costs, and this year's deficit also looks likely to run higher than hoped because of ever-increasing loan losses in Ireland's largely nationalized banks.

Moody's said it was lowering its rating on Ireland two notches from Baa1 because the Irish economy appears unlikely to grow much, if at all, in 2011 while private access to credit needed to stimulate growth remains weak. It also kept Ireland on a negative outlook, meaning it considers a future downgrade probable.

The agency said lower growth would make it harder for the government to slash its deficit without imposing even tougher spending cuts than already envisaged. Ireland is already committed to reducing deficits by 15 billion ($21.75 billion) from 2011 to 2014 through cuts and higher taxes.

"Should the intended fiscal consolidation goals not be met, a further rating downgrade would likely follow. Moreover, a further deterioration in the country's economic outlook would also exert downward pressure on the rating," said Dietmar Hornung, Moody's senior analyst on Ireland.

Moody's is taking the dimmest view of Ireland's credit worthiness of the three major ratings agencies.

Fitch on Thursday said it was keeping Ireland's score at BBB-plus, three grades above junk, but with a negative outlook.

Standard & Poor's is the most optimistic. On April 1 it downgraded Ireland one notch to BBB-plus but raised its outlook to stable. S&P argued that Ireland's strong export sector meant it was better placed to rebound than Greece, the first eurozone member to take a bailout, and Portugal, which is currently negotiating one.