By Andras Gergely
DUBLIN (Reuters) - Ireland's borrowing costs leapt again on Tuesday after two credit rating agencies warned its debt is at risk of further downgrades, piling pressure on the government to bring forward its budget.
Ireland is battling to convince investors it can afford to shore up its banking sector and cut the biggest budget deficit in the European Union, given its weak economy and growing risks of a political crisis.
"I cannot pretend that the current rating is totally secure," Chris Pryce, a senior analyst with Fitch, which currently has Ireland at AA- with a stable outlook, told Reuters in an interview.
The government is hoping a final bill for dealing with nationalized lender Anglo Irish Bank, expected later this week, will clear up fears that the cost will vastly exceed a current estimate of 25 billion euros ($34 billion).
"We will be ... providing a manageable way forward on how that will be dealt with over the longer term," Prime Minister Brian Cowen told reporters.
"We are determined to do what's necessary to achieve international confidence and build domestic confidence."
But Standard & Poor's, in a Sep. 14 interview broadcast on Ireland's state broadcaster on Tuesday, said its 35 billion euro estimate for Anglo, a figure heavily criticized by local policymakers, looked increasingly realistic and any amount beyond that could trigger rating downgrades.
The ratings agencies' warnings, including Moody's decision Monday to slash its ratings on Anglo Irish's lower-grade debt, sent Irish credit premiums and the cost of insuring Irish debt from default to new highs.
The news also drove the premiums on bonds from other economies on the euro zone periphery to new highs.
The OECD's chief economist told Reuters he did not see Ireland heading toward a Greek-style crisis.
Ireland is funded until mid 2011 but the rising borrowing costs are unsustainable over the medium term and are putting mounting pressure on Cowen as he heads into a new parliamentary term on Wednesday, with his coalition and deficit-cutting mandate shaky.
Some analysts have said Cowen needs to speed up the budget announcement.
"The costs are rising because of policy inaction on behalf of the incumbent government," said Ciaran O'Hagan, bond strategist with Societe Generale.
"The French budget is being published tomorrow, the Irish budget is being published in December. They are going to give a pre-budget statement in the second half of October, that's a month away."
Cowen, who recently shook off calls to resign after a boozy night out, was blasted by Irish tabloids on Tuesday after U.S. chatshow host Jay Leno ridiculed him as a "drunken moron."
ONE MORE SHOT?
Fitch's Pryce said the government's wafer-thin parliamentary majority, which could fall from four to two, was a worry but Cowen still had time to reassure investors.
"Further downgrades may be avoided," Pryce said. "The Irish government has at least one more shot in its bow."
But O'Hagan said the credibility of the Anglo bill was dependent on the outlook for the Irish housing market, where prices are in some cases half their peak and still dropping.
"Even if the government does come out with a number, the only thing that will make it believable is if there is some sort of prospect of stability for the housing market."
The 25 billion euros of aid so far earmarked for Anglo Irish would already push Ireland's 2010 budget deficit to around 25 percent of gross domestic product, compared with an EU limit of 3 percent that Dublin aims to reach by 2014.
Dublin has said the budget blow-out is a one-off due to European accounting rules and the impact of the Anglo bill would be minimized by spreading the cost over at least a decade.
But investors remain unconvinced about the plan to wind down Anglo via a split into a "funding bank" and an "asset recovery bank," and the cost of insuring Irish sovereign debt against default hit a record high of 519 basis points.
On Dublin's main thoroughfare O'Connell Street, recession-weary city residents were equally downbeat.
"It feels a bit doom and gloom again, like things are getting out of control," said Darragh, 23, a recently graduated engineering student who is looking for work.
Adding to the nervousness is the ending of a state guarantee on dated subordinated debt on September 30. A guarantee on senior bonds worth 4.2 billion euros in Anglo Irish lapses as well.
Ratings agency Moody's downgraded Anglo Irish's unsecured senior debt on Monday, citing a small residual risk the government might not support this debt.
A finance ministry spokesman said on Tuesday Ireland will honor its obligations to senior bondholders.
Analysts expect the government to buy back Anglo's 2.4 billion euros in subordinated bonds at a discount. The paper has been trading at a discount of 70 percent-80 percent in the secondary market.
(Writing by Carmel Crimmins; Editing by Ruth Pitchford)
