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Ireland's debt rating cut to junk by Moody's; euro slides

Ireland's debt rating was cut to junk status Tuesday by Moody's Investors Service, dashing financial markets' hopes for a stretch of calm after the latest upheaval in Europe.

Moody’s dropped Ireland to Ba1 from Baa3, citing a “growing likelihood” that private investors in Irish bonds will be forced into a restructuring of their securities to help solve the country’s heavy debt burden.

Any rating below Baa means the issuer’s debt is considered non-investment grade. The ratings firm also said it kept its outlook for Ireland negative, which means further cuts are possible.

Moody's move is at odds with rivals Standard & Poor's and Fitch Ratings, both of which still rate Ireland investment-grade, at BBB-plus, Ireland's Finance Ministry noted in a statement.

Moody’s wording was similar to what it said a week ago when it cut Portugal to the junk rating of Ba2 from Baa1. The firm sees a “growing possibility” that Ireland and Portugal both will need second bailouts by the European Union, just as Greece has gone back for a second round of help.

Dublin And as a condition of a second bailout, Moody’s says EU policymakers’ “increasingly clear preference” is to have private investors give something back -- roll their bonds into longer-term securities, for example, or take an interest-rate cut.

“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 well as Ireland,” Moody’s said.

But European policymakers haven’t yet settled on the kind of “participation” they’d like to see from Greek bondholders.

Moody’s decision was announced after European markets closed, but in time to ruin Wall Street’s day: The Dow Jones industrial average lost 58.88 points, or 0.5%, to 12,446.88 after being up as much as 65 points.

The euro fell to $1.397 from $1.403 on Monday. The currency has fallen from $1.453 a week ago.

While European authorities still are wrestling with bailouts of Greece, Ireland and Portugal, the “contagion” from the debt crisis spread to the far larger economies of Spain and Italy over the last week, pushing those countries’ bond yields sharply higher.

Before Moody’s announcement on Ireland, Spanish and Italian bond yields edged down Tuesday, in part on rumors that the European Central Bank was buying bonds in the open market.

Spain and Italy still have investment-grade ratings on their debt. Both are rated Aa2 by Moody’s.

But Portugal was Aa2 until last summer. Ireland was Aa2 until December.

-- Tom Petruno

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Photo: Dublin, Ireland. Credit: Aidan Crawley / Bloomberg News

 
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