DUBLIN (Reuters) - Credit agency Moody's dashed Irish hopes of an investment grade rating following a landmark 10-year bond issue, saying Cyprus' "unprecedented" bailout increased the risks associated with holding Irish debt.
Moody's, the only agency that ranks Ireland's debt as 'junk', said on Thursday that, despite the country's "steady progress" in regaining market access, it was maintaining its Ba1 rating with a negative outlook due also to issues with the banking sector.
"Ireland's vulnerability to wider euro-area stresses has been reaffirmed by euro area policymakers' handling of the Cyprus crisis," Moody's said in a statement.
The crisis showed policymakers' "increased risk tolerance" and "a more uncompromising and less predictable approach to crisis management."
Owen Callan, a Dublin-based bond dealer at Danske Bank, said the rating affirmation was a "big disappointment" as investors had priced in an upgrade.
The early market reaction was relatively muted, however. At 08:13 a.m. British time, both the yield on Ireland's benchmark 2020 bond and the 10-year spread over German Bunds widened by 5 basis points, bidding at 4.31 percent and 305 basis points respectively.
Ireland took its biggest step yet this month towards exiting its international bailout later this year, selling 5 billion euros ($6.4 billion) of new benchmark 10-year bonds.
Irish officials had hoped Moody's would at least lift its negative rating outlook after the benchmark issue, the first since the 2010 bailout.
The head of Ireland's debt agency John Corrigan said at the time that the success of the auction indicated "either the market is wrong or Moody's is wrong."
But Moody's said despite steady progress, the continued poor asset quality of Ireland's banks, and their likely reluctance to provide new credit when loan demand revives, indicated that the country did not deserve investment grade.
"Following the almost uninterrupted run of more favourable newsflow on the Irish economy and sovereign over recent months, Moody's provides what might be described as a reality check this morning," said Dermot O'Leary, chief economist at Goodbody Stockbrokers.
"Ultimately, the decision is a reminder that the job is not done."
(Reporting by Conor Humphries Ian Chua; Editing by Eric Meijer; Editing by John Stonestreet)