Trading Moody's Downgrade of Irish Debt

 |  Includes: EIRL, ELN, EPV, RYAAY
by: Benzinga

By Daniel James Hayden IV

Moody's Investors Service downgraded Ireland's credit rating two notches to Baa3 from Baa1 on Friday and said that the outlook for the financially troubled country remains negative.

Moody's said that the key factors of its downgrade of Irish debt were the decline of the government's financial strength, the country's weakening economic growth prospects and uncertainty caused by the solvency test required by the European Stabilization Mechanism (ESM) for the provision of future liquidity support.

According to Moody's, the negative outlook for Ireland is based on its view that the Irish government's financial strength will further deteriorate if economic growth is weaker than current projections or if fiscal adjustment falls short of the government's consolidation path.

The rating agency said that in a related move it also downgraded Ireland's National Asset Management Agency, whose debt is guaranteed by the Irish government, to Baa3 from Baa1 with a negative outlook.

Ireland was the recipient of a bailout from the European Union and the International Monetary Fund last year that was needed to shore up the Irish government's financial position.

However, one of the main problems now facing Ireland that Moody's cited is that the austerity program agreed to by the Irish government is weakening the country's domestic demand. Private sector access to credit has also been reduced and interest rates have become unfavorable.

The result is that the very actions that have been taken to shore up the government's financial position are slowing economic growth, which in turn weakens the government's financial position.

According to Moody's, "The ongoing fiscal austerity programme is weakening domestic demand. The announced EUR15 billion (9.6% of 2010 GDP) reduction in net expenditure over the next five years, which is aimed at reducing the general government budget deficit to 3% of GDP by 2015, is likely to place considerable pressure on the country's recovery prospects. Additional consolidation measures may be needed to enable the country to meet fiscal targets."

Investors who are interested in Ireland have many investment options to consider.

Ryanair Holdings plc (NASDAQ:RYAAY) and Elan Corporation, plc. (NYSE:ELN) are two companies that are worth taking a look at.

Investors who want exposure to the broader Irish market may opt for the iShares MSCI Ireland Capped Investable Market Index Fund (NYSEARCA:EIRL).

Investors who feel that the continued downgrading of eurozone debt ratings is a negative sign for Europe might want to consider the ProShares UltraShort MSCI Europe ETF (NYSEARCA:EPV).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.