By Carmel Crimmins and Padraic Halpin
DUBLIN (Reuters) - Fitch cut Ireland's credit rating Wednesday and consumer morale slumped as the cost of cleaning up its banks hit home and the financial regulator warned of more bad news as the country's property market continues to unravel.
The flurry of negative headlines hit a day after Moody's said it too might downgrade Ireland and drove up Irish borrowing costs, putting further pressure on a government saddled with a debt pile set to hit 155 billion euros this year or 100,000 pounds for each of the country's 1.5 million households.
As well as cutting Ireland to A+ from AA-, Fitch put its rating on a negative outlook, also pointing to uncertainty over the country's wavering economic recovery.
"The downgrade of Ireland reflects the exceptional and greater-than-expected fiscal cost associated with the government's recapitalization of the Irish banks, especially Anglo Irish Bank," Fitch said in a statement.
"The negative outlook reflects the uncertainty regarding the timing and strength of economic recovery and medium-term fiscal consolidation effort."
The Irish government last week revealed it could cost as much as 50 billion euros ($69.3 billion), or over 11,000 euros per head of a recession-weary population, to unwind years of reckless lending to developers during the "Celtic Tiger" boom.
The financial regulator said Wednesday it would take at least five years to stabilize funding at Ireland's commercial banks and warned popular savings and lending cooperatives known as credit unions were also proving a source of concern.
"We are finding systematic under-provisioning in the credit unions that is a worry to me and I think we need to take that seriously," Matthew Elderfield, the central bank's head of financial regulation, said during testimony to lawmakers.
"There is huge pressure on balance sheets at the credit unions, very severe pressure," he told parliament's Joint Committee on Economic Regulatory Affairs.
The credit unions hold savings of 11.9 billion euros and have 2.9 million members which equates to nearly two thirds of the country's population. On average they are under-provisioned on their loans by 40 percent, Elderfield said.
He also warned that figures on mortgage arrears only reveal part of the problem because they do not include those people who have managed to negotiated new repayment schedules.
Adding to pressure on borrowers, recent data indicates Ireland's brief and modest economic recovery may have petered out, with surveys over the last week indicating that both its services and manufacturing sectors are back in recession.
Irish consumer sentiment plummeted in September as the enormity of the country's bank bailout and fear of more budgetary pain ahead panicked some people into pulling back on buying, another survey showed Wednesday.
"This year I've had to write off 600,000 euros so that's how hard it has been," said Pat McEvoy a builder from Kilkenny in south east Ireland who had to sack eight employees and is considering moving to Canada to work.
"The killing part of it is we can't get carers' allowance here in Ireland for our daughter and it's costing us about 200 euros a week for physio and speech therapy."
The fragility of Ireland's economic recovery and the scale of the mess at its banks has spooked lenders and it now costs Ireland almost three times as much to borrow as Germany.
The 10-year Irish/German bond yield spread widened to 425 bps from 420 bps before the Fitch downgrade while the cost of insuring Irish debt against default rose, with Irish 5-year credit default swaps at 450.8 basis points from 437.4 bps at the New York close Tuesday.
The impact of the Fitch downgrade was felt across the euro zone, with German government bond futures hitting a session high and the cost of insuring Greek debt rising.
The move means its rating is now one notch below Standard & Poor's and two notches below Moody's which warned Tuesday it may cut Ireland's rating, saying it expects the government to implement further austerity measures when it unveils a 4-year fiscal plan next month.
"With November's four-year budget plan looming, one could say that the timing is a little bit surprising but clearly Fitch believe higher bank bailout costs warrant a move now rather than later," said Michael Cummins at Dublin-based Glas Securities.
"It's going to cause a knee jerk reaction, like every negative headline, but a lot of it has already been priced into the bond and CDS markets."
Fitch analyst Chris Pryce told Reuters last week that the country's credit rating was not secure.
Ireland is still well short of the BBB- rating -- one step short of junk status -- that Fitch has on Greece, however.
"Ireland still retains considerable financial flexibility," the agency said of a country that has said it will not need to raise money on bond markets again this year.
"Ireland is regaining its international competitiveness lost during the 'boom' years and ... the drag on growth from the collapse of the construction boom has mostly run its course."