Lloyds reveals new hit from failing Ireland

Economics Editor,Sean O'Grady
Saturday 18 December 2010 01:00
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Lloyds banking Group's exposure to the troubled Irish economy pushed its shares sharply lower in trading yesterday, as the Moody's credit ratings agency issued a radical downgrade of Irish government debt.

Shares in other banking groups, such as Royal Bank of Scotland, which has sizeable Irish presence via its Ulster Bank subsidiary, also suffered as Lloyds revealed it was substantially increasing the provisions it has made against defaults in the country.

Yesterday's downgrade of Ireland's debt to Baa1 from Aa2 left it just three places above "junk bond" status in the Moody's pecking order, and well below the norm for EU member states. Even more substantial losses at Irish banks, especially Anglo-Irish, were revealed a few weeks ago. The banks rely heavily on state aid and, after a €85bn (£72bn) bailout, on assistance from the European Union and IMF.

The European Central Bank is also thought to have been a buyer of Irish government securities in recent weeks, shunned as they are by private investors. The yield on Irish bonds rose again, by about 20 basis points to around 8.4 per cent.

Policymakers in London areincreasingly concerned about British banks' exposure to the eurozone. The Bank of England has said that they are "only partially insulated" fromdirect exposure to the peripheral economies and much more sizeable indirect exposure via German and French banks.

Lloyds said a further 10 per cent of its £26.7bn in Irish assets wouldbecome impaired by the end of this year, as Ireland's property market looks set for further traumas and the toughest austerity programme in the state's history. Lloyds' provisions on Irish debt will rise to £4.3bn. Its shares slid 3.57 per cent yesterday, while Royal Bank of Scotland was down 5.73 per cent.

Keeping strange company

As recently as July, Ireland was still able to command the cherished AAA status accorded to the best risks; it then slipped to Aa2, sitting alongside Italy, Japan and Bermuda. But now itis mixing it with Thailand, Russia, Lithuania, Trinidad and Tobago and Mexico. But it could be worse: Ireland is still ahead of Bulgaria, Romania and Hungary in the EU, as well as Iceland and such trendy investor choices as Kazakhstan, Brazil and India. Cuba and Ecuador are rock-bottom among those graded – Caa1 and Caa3 respectively.

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