By Carmel Crimmins
DUBLIN (Reuters) - Ireland's government faced mounting pressure on Wednesday to put a final price on bailing out its banks after a credit rating cut from Standard & Poor's pushed its borrowing costs higher.
After winning plaudits for moving quickly to tackle its deficit, Ireland is once again at the center of European debt fears with investors demanding a whopping 340 basis point premium to hold Irish 10-year debt over German Bunds, the highest level since the Greek financial crisis gripped in May.
S&P cut Ireland's long-term rating by one notch to 'AA-' on fears of a substantially higher bill for supporting the banking sector and assigned a negative outlook, meaning another cut is more likely than not over the next one or two years.
Dublin hit back, saying S&P's analysis was "flawed."
S&P hiked its estimate of the cost to the government of recapitalizing the banks at 45-50 billion euros ($63 billion), a figure dismissed by the country's debt agency in highly unusual criticism.
"Exceptionally, we have taken issue with the rating agency. It's something we don't like to do but there comes a point when the analysis is not robust," John Corrigan, the chief executive of the National Treasury Management Agency (NTMA), told state broadcaster RTE.
Investors were rattled nonetheless.
"The banking situation is and should be No. 1 priority for the government for the next couple of months," said Dermot O'Leary, chief economist with Goodbody Stockbrokers in Dublin.
"The market is already pricing in another downgrade and probably another two downgrades."
Rating agencies have been steadily hacking away at Ireland's credit rating and S&P's is now on a par with Fitch and one notch below Moody's, which cut its rating to Aa2 last month. Both Fitch and Moody's have stable outlooks.
STEADILY MOUNTING BILL
Ireland created a "bad bank" or National Asset Management Agency (NAMA) last year to purge its banking sector of soured property loans clocked up in a decade-long property binge.
But hopes of a quick and clean solution to the banking crisis have disappeared as the toxic nature of loans written by nationalized lender Anglo Irish Bank in particular have led to a steadily mounting bill.
Ireland's central bank governor last week said the net cost to the taxpayer of dealing with Anglo Irish and two building societies could be up to 29 billion euros, representing nearly 20 percent of gross domestic product.
But a final figure will not be known until the end of the year, when NAMA is set to complete its purchase of loans from the banks.
The government has to push yet more unpopular spending cuts at the end of the year but with coalition frictions growing and its majority on a knife-edge, analysts say there is no guarantee the administration will make it through the year.
Although Ireland has raised virtually all of the 20 billion euros of long-term debt targeted for 2010, S&P's cut and the lingering uncertainty over Anglo Irish will make it more difficult for the country's banks to extend the maturity of their funding later this year and eventually wean themselves off a state guarantee on their debt.
Irish banks' credit default swaps widened after the S&P move, with Anglo Irish's 5-year CDS 20 basis points wider at 585 bps, with the rating cut also hitting stocks across Europe.
The NTMA will auction treasury bills worth between 400 million and 600 million euros on Thursday as part of a regular sale of short-term paper.
Brenda Kelly, an analyst at CMC Markets, said she expected Ireland would have to pay more in the sale. "I think we are going to have to an awful lot more in interest payments."
(Additional reporting by Andras Gergely; Editing by Mike Peacock)
