Investors rocked as credit agency slashes Irish bank's debt rating

Credit agency Moody's slashed its ratings on Anglo Irish Bank's lower-grade debt, rattling investors as Dublin tots up the final cost of rescuing a lender whose soured loans have crippled the country's economy.

Moody's cut the nationalised bank's senior unsecured debt by three notches to Baa3 – just one notch above junk status – citing a small risk the government would not continue to support that class of debt, the agency said. It slashed Anglo Irish's subordinated debt by six notches to Caa1.

The steadily mounting scale of the bank's rescue has heaped further pressure on already strained public finances, propelling the former 'Celtic Tiger' economy to the forefront of investor concerns about the sustainability of sovereign debt in the euro zone.

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According to unnamed government sources, the European Central Bank gave serious consideration to activating the euro zone's bailout fund for Ireland but in the end decided not to.

Finance Minister Brian Lenihan has said it was unthinkable that Ireland would default on senior debt but, in the absence of such assurances given on subordinated paper, analysts say those might face a buyback at well below par.

The euro fell to an intraday low against the dollar following Moody's announcement. Al-ready high yield spreads on Irish debt compared with German equivalents were little changed.

The rating agency said that while it still expected the government to support all grades of senior debt, the rating would remain under review for possible downgrade until a decision was made.

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"While Moody's considers the likelihood of the government not supporting this (senior unsecured) debt to be very small, this risk has been reflected in the three-notch downgrade," Ross Abercromby, lead analyst for Anglo Irish at Moody's, said in a statement.

Facing political pressure to shut down Anglo Irish, whose loan book soured dramatically after a disastrous property binge left it heavily exposed to the impact of the financial and market downturn, the government has outlined a compromise plan.

It is splitting the lender into an asset recovery bank and another entity to house its deposits which will not lend any money.

Though the final cost of the exercise is not expected to be revealed until later this week or early October, the 25 billion euros so far earmarked would already push Ireland's 2010 budget deficit to well over 20 per cent of gross domestic product.

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