Moody’s downgrade shoves Irish 10 yr bonds to 8.6%

EU shocked by Irish debt downgrade

European leaders received a nasty shock as the credit agency Moody’s downgraded Ireland’s debt, even as the politicians closed a summit intended to prop up confidence in the eurozone.

Ireland faces significant risks that could affect its ability to repay the IMF’s share of the 85bn-euro international bail-out it received Photo: APBy Emma Rowley 7:56PM GMT 17 Dec 2010

The dramatic downgrading of Irish debt by five levels sent the cost of the country’s borrowing up, as yields – the returns demanded by wary investors – on 10-year government bonds rose more than 24 basis points to pass 8.6pc.

If Ireland cannot stabilise its debt then further revisions may follow, warned Moody’s, which has also told Greece and Spain their ratings could fall.

“I don’t understand what they do,” Nicolas Sarkozy, the French president, said of the agency’s latest move. “This decision – I simply call it stunning.”

However, the International Monetary Fund (IMF) warned that Ireland is not on track to hit its target of achieving a budget deficit of 3pc of GDP by 2015. The beleaguered nation faces significant risks that could affect its ability to repay the IMF’s share of the €85bn (£72bn) international bail-out it received, the fund said.

The European Central Bank (ECB) on Friday said it has arranged to borrow up to £10bn from the Bank of England in a temporary swap to ease liquidity at Irish banks.

15 Dec 2010

The ECB this week said it would arm itself with more capital to resist the eurozone’s debt crisis, which has seen solvency fears push nations’ borrowing costs sky high.

Analysts took the latest move to indicate that Irish banks are short of sterling, as deposits and wholesale funding fall away.

The developments came as European leaders on Friday closed a two-day summit in Brussels, where they agreed to tweak the EU treaty to create a permanent financial safety net to resolve future crises.

Germany insisted that the long-term mechanism, to come into force in 2013, would come with the condition, enshrined in the treaty, that it only be activated “if indispensable to safeguard the stability of the euro as a whole”.

“The heads of state and government of the eurozone stand ready to do whatever is required to ensure the stability of the eurozone as a whole,” said Herman Van Rompuy, the EU president.

However, the leaders did not decide to increase the existing rescue fund, the European Financial Stability Facility, or allow it to be used more flexibly to buy bonds. Fabio Fois, economist at Barclays Capital, called it “another missed opportunity to calm the markets”.

Dominique Strauss-Kahn, the head of the IMF, has warned against Europe’s “piecemeal” approach.

Separately, on the summit’s sidelines, the UK won support for plans to freeze the shared EU budget in real terms. “Countries are tightening their belts to deal with their deficits. Europe cannot be immune from that,” said Prime Minister David Cameron.