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Debt

Treasury agency attacks S&P - so what do ratings mean?

The NTMA is upset – so why is it important that S&P downgraded our national debt rating?

THE NATIONAL TREASURY MANAGEMENT AGENCY – the body which manages Ireland’s borrowing requirements, and its national debt – has criticised the decision of ratings agency Standard & Poor’s to downgrade Ireland’s debt rating.

The decision from S&P to downgrade the ratings – down to AA- from a previous rating of AA – means that Irish debt is seen as a riskier investment, and will likely see the NTMA required to increase it pays to investors who buy Irish debt.

NTMA chief John Corrigan told RTÉ that S&P’s analysis was based on an “extreme estimate” that the final cost of the government’s bank recapitalisation programme would reach €50 billion.

“We have taken issue with the rating agency,” he said. “It’s something we don’t like to do but there comes a point when the analysis is not robust.”

Last night, as news of the downgrade broke, the NTMA issued a statement with a similar conclusion, describing the approach as “flawed“.

What does it mean?

But why is the NTMA so annoyed – and how important is it that our rating has been downgraded?

Well, basically Ireland’s national rating is similar to the credit rating a person might get. If you’re good at making loan repayments or have a lot of money in the bank, you’ll get a good rating. If you struggle to repay your debts and don’t have much assets, you’ll get a lower rating and it therefore becomes tougher for you to to borrow.

As the name might suggest, an ‘AAA’ (or “triple A”) rating is the best one the agency can offer, with progressively fewer As – and the occasional plus or minus – being given to lower rankings.

Ireland’s new score of AA- isn’t exactly top of the class, but it’s still definitely in the upper reaches of the scores S&P assigns. We’re still very far away from being called ‘junk’. In fact, we could slip to a single A or even to BB before we’re given that ignominious title.

The only difference is that unlike the Moody’s downgrade last month, which brought its rating in line with those of S&P and the other main ratings agency Fitch, this change brings Ireland’s average another step downward.

We won’t find out for some time how the downgrade will affect us, however – the NTMA’s next bond auction isn’t until September 21, and the agency has already raised 99% of Ireland’s fundraising target for the year with three auctions still to go.

It will also be interesting to see whether the other agencies follow suit, with the S&P rating based on an arguably inflated estimate of how much the bank bailout will ultimately cost. Other ratings may be a little more conservative than S&P’s €50bn projection.