European Banks Fall as S&P Cuts Sovereign Credit Rating of Ireland to AA (AIB, IRE, LYG, RBS)

June 8, 2009 10:58 AM EDT

Several European banks are under pressure this morning following news that S&P downgraded the long-term sovereign credit rating of Ireland from AA+ to AA. Among the banks seeing downside today are Allied Irish Banks (NYSE: AIB), down 9.6%, Bank of Ireland (NYSE: IRE), down 4.6%, Lloyds Banking Group (NYSE: LYG), down 9.3% and Royal Bank of Scotland (NYSE: RBS), which is down 4.3% currently. The credit-rating agency kept its outlook on the country at Negative.

The S&P said, "We have lowered the long-term rating on Ireland because we believe that the fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009, and, consequently, that the net general government debt burden will also be significantly higher over the medium term." Effectively, a lower credit-rating creates an environment where the Irish government could be forced to pay even higher interest rates in order to borrow money as investors require higher premiums.

Further, S&P said the Irish rating could be cut again "if asset quality in the Irish banking system deteriorates at a faster pace than expected and if, as a result of its support for the sector or due to an even more pronounced downturn in economic growth, the government's fiscal performance weakens further than it currently assumes."

On the other hand, the rating agency said the credit outlook could be upgraded to Stable "if the Irish banking sector stabilizes more quickly and at a lower fiscal cost to the government than we now think likely".

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