CORRECTED – UPDATE 2-S&P cuts Ireland; Fitch in downgrade threat

(Removes reference to ECB adding margin to Irish debt after
ECB says that will not be the case due to fourth rating agency
DBRS still rating Ireland at “A”)

* S&P has stable outlook; Ireland rated above Portugal

* Irish spreads narrow as downgrade less severe than expected

* Ireland is hoping it won’t have to borrow more for banks

* Snr bank debt rallies after risk of imposed losses abates

By Carmel Crimmins and Conor Humphries

DUBLIN, April 1 (Reuters) – Standard & Poor’s stripped
Ireland of its last major ‘A’ rating on Friday, citing future
risks to bondholders, but the 1 notch cut and stable outlook was
less severe than feared and gave the thumbs up to the state’s
bank bill.

Rival agency Fitch took the shine off S&P’s modest downgrade
however when it warned that it could cut its BBB+ rating on the
back of weaker economic growth and a jump in the cost of bailing
out the banks.

Ireland’s new government has said it will recapitalise its
banking system to the tune of a further 24 billion euros to try
and draw a line under a legacy of reckless lending that has
forced it into an EU-IMF bailout.

S&P, whose rubbishing of a previous “final bill” for
Ireland’s banking sector sent the country’s debt crisis into
overdrive last year, said the assumptions underlying the latest
round of stress tests were robust.

They changed their outlook to stable, meaning no further
downgrades in the pipeline.

“It’s as positive as a downgrade can be,” said Eoin Fahy,
economist at Kleinwort Benson Investors.

“I would take that as distinctly positive. The fact that
they moved us to stable is significant and the language they
have used is encouraging. I was worried we would see two or even
three notches (cut).”

The premium investors demand to hold Irish debt
(IE10YT=TWEB: Quote, Profile, Research) over benchmark German paper (DE10YT=TWEB: Quote, Profile, Research) narrowed
by 12 basis points to 6.72 percent.

The yield was unchanged after Fitch’s warning.

Earlier, there was a muted reaction to Dublin’s “big bang”
bank announcement on Thursday when it ratcheted up estimates for
the total bill for bailing out its banks to 70 billion euros and
pledged a radical shake-up of the sector.

S&P now rates Ireland BBB+, above fellow euro zone
strugglers Portugal and Greece, in line with Fitch. Moody’s
rates Ireland Baa1 with a negative outlook.

The rationale for the cut was the risk that bond investors
could be hit if Ireland needs to borrow from a new European
bailout fund, set to be up and running in 2013.

Ireland is already borrowing off the euro zone’s temporary
rescue fund and some analysts think Dublin will need to tap the
permanent bailout fund despite government ambitions to return to
the debt markets, possibly in the second half of 2012.


S&P said it expected the Irish economy would gradually
recover after a three year contraction and its reliance on
external trade meant that it had better growth prospects than
Portugal and Greece.

But Fitch was less upbeat, warning that there was
significant uncertainty surrounding the outlook for economic
growth this year.

A weak outlook coupled with the European Central Bank’s
failure to provide a formal medium-term liquidity facility for
Irish banks means that investors still doubt the state can
shoulder its debt burden.

“If our economy goes well, if we get back to growth, get to
full employment, then we can pay this easily,” central bank
governor Patrick Honohan told a TV interview. “If economic
growth is weak, then it won’t be so easy.” [ID:nLDE72U2L1]

The ECB said it would give Irish banks continued access to
liquidity and said it had suspended collateral requirements for
Irish sovereign and Irish guaranteed debt.

European clearing house LCH.Clearnet raised the margin
requirement it charges on Irish bonds to 45 percent from 35
percent on Friday making it more expensive to trade Irish debt.

The ECB assurance means that the Irish banks are still
accessing short-term loans, totalling 89 billion euros at the
end of last month, and are exposed to future rate hikes.

Analysts said Europe would need to come up with a
longer-term liquidity facility for struggling euro zone banks.

“If that is everything the ECB does then it would turn into
a significant issue,” said Holger Schmieding, economist at
Berenberg, arguing the result is that the ECB would not be able
to withdraw its overall emergency support for banks.

“The ECB should really go towards targeted support for
specific banks or banking systems, under conditions,” he said.

Finance Minister Michael Noonan hopes he can cap the
state’s part of the 24 billion euros bill at around 16 billion
euros, which can be funded out of the 17.5 billion euros Irish
government contribution to the 85 billion euros EU-IMF bailout.

The rest would be paid by imposing losses on banks’
subordinated bonds, which Noonan said could raise between 5
billion and 6 billion euros, and asset sales.

If Ireland has to pump the full 24 billion euros into the
banks its debt to GDP ratio would rise to 111 percent by 2013
from around 100 percent currently, a finance official said.

Shares in Bank of Ireland (BKIR.IA: Quote, Profile, Research) rose on the government’s
commitment to make it one of the pillars of a new two-bank
system, while the government’s retreat on a threat to impose
losses on some bondholders pushed senior bank debt higher.

(Additional reporting by Padraic Halpin and Steve Slater;
editing by Patrick Graham)

CORRECTED – UPDATE 2-S&P cuts Ireland; Fitch in downgrade threat