Full Text: Moody’s affirms Ireland’s Ba1/NP ratings and negative outlook
Editor’s Note: Moody’s issued the following statement on Irish sovereign debt yesterday.
Moody’s Investors Service has today affirmed the Republic of Ireland’s Ba1/Not Prime government bond ratings and negative outlook.
The drivers for maintaining the negative outlook on Ireland’s sovereign ratings are:
1.) The euro area’s continued vulnerability to shocks emanating from the regional debt crisis, most recently the agreement by the European Union (EU) to the “bail-in” of bank deposits to raise part of the funds needed for Cyprus’ financial rescue.
2.) The continued poor asset quality of the Irish banking system.
The drivers for affirming Ireland’s Ba1/NP sovereign ratings are:
1.) The Irish government’s progress in implementing the economic adjustment programme under the auspices of EU, International Monetary Fund (IMF) and the European Central Bank (ECB), collectively known as the Troika.
2.) Ireland’s steady progress in regaining market access and obtaining private-sector financing at an affordable cost, a prerequisite for the country to successfully conclude its EU/IMF-sponsored economic adjustment programme this year without needing a second bailout.
3.) Ireland’s regained competitiveness, with generally positive growth deriving from a strong contribution of net exports, the apparent bottoming-out of the housing sector correction and its continued ability to attract foreign direct investment.
In a related rating action, Moody’s has also affirmed the Ba1/NP ratings and negative outlook on Ireland’s National Asset Management Agency (NAMA), whose debt is irrevocably and unconditionally guaranteed by the government.
RATIONALE FOR MAINTAINING IRELAND’S NEGATIVE RATING OUTLOOK
The first driver underlying Moody’s decision to maintain a negative outlook on Ireland’s Ba1 sovereign rating is the country’s susceptibility to euro-area-related event risk because of its very high debt levels and ongoing asset quality issues affecting its banking system. Such risks were most recently evidenced by the EU’s unprecedented decision to fund Cyprus’s financial rescue by imposing a levy on bank deposits above a certain size. The move has significantly heightened fears surrounding the safety of bank deposits in other European systems. More generally, Moody’s believes that Ireland’s vulnerability to wider euro-area stresses has been reaffirmed by euro area policymakers’ handling of the Cyprus crisis, the increased risk tolerance apparent in their actions, and the uncertain risk assessment prompted by a more uncompromising and less predictable approach to crisis management.
The second driver for maintaining Ireland’s sovereign rating on negative outlook is the continued poor asset quality of Ireland’s banking system, which represents a constraint on their willingness to provide new credit at such time when loan demand revives. In addition, Moody’s notes that Irish banks have not yet begun implementing the Central Bank of Ireland’s new requirement to repossess homes when mortgages have been non-performing for a lengthy period, nor to adequately provision for their non-performing portfolios. Moody’s baseline case is that Irish banks’ large capital cushions should be able to accommodate this process without additional liabilities accruing to the government’s balance sheet.
RATIONALE FOR AFFIRMING IRELAND’S Ba1/NP RATINGS
The primary driver underpinning Moody’s decision to affirm Ireland’s Ba1/NP sovereign ratings is the government’s successful implementation of the Troika’s economic adjustment programme, which began in November 2010 and is coming to an end later this year. From the start, the Irish government has consistently met and in some respects exceeded the quarterly programme criteria, despite difficult domestic and external conditions. Moody’s expects that Ireland’s debt will likely peak at roughly 120% of GDP in 2013 and 2014, before starting to drop in 2015, thereby reversing the adverse debt trend of the recent past.
The second driver informing the rating affirmation is the steady progress that Ireland has made in gradually regaining market access at an affordable cost of financing. The Irish government has made several forays into the market since January 2012, first to swap shorter-term for longer-term debt to reduce early refinancing risks, and then to obtain new funds in successive medium-term bond issues. This progress, which most recently culminated in a well-received ten-year bond issue, has allowed Ireland to meet all of its financing needs for 2014. In addition, Moody’s observes that refinancing risks will diminish further in subsequent years as a result of (1) the restructuring of the government’s promissory note debt, which was incurred when the sovereign extended support to the Irish banking system in 2010, and (2) the agreement with the EU to extend bailout maturities.
The third driver for maintaining Ireland’s sovereign rating is Moody’s expectation that Ireland’s economy will be able to grow at a moderate pace in the coming years, although the initial pace is likely to be below its long-term potential. Thanks to the dynamism and high value added of the country’s export sector, the relatively diversified export markets and the improved competitiveness that have been achieved via nominal wage adjustments, Moody’s expects that growth in Ireland is likely to remain positive this year, even though the rating agency expects the euro area economy as a whole to register a second consecutive contraction in 2013.
WHAT COULD MOVE THE RATING DOWN/UP
Moody’s would consider downgrading the country’s Ba1 sovereign ratings if sizeable additional banking sector liabilities were to be added to the Irish government’s balance sheet, or in the event of a further rise in the government’s debt ratios due to fiscal slippage. The rating agency would also view negatively any renewed increase in Ireland’s debt costs because of a loss of market confidence in the Irish recovery and/or in euro area policymakers’ ability to contain the euro area debt crisis.
Conversely, the agency would consider raising Ireland’s rating outlook and eventually upgrading the country’s Ba1 government bond ratings if the government’s financial balance, excluding interest payments, were to move into a surplus large enough for the country’s debt-to-GDP ratio to stabilize and then begin to decline. Moody’s would also view positively the IMF and EU’s approval of external monitoring or a precautionary credit line that would qualify Ireland for the ECB’s Outright Monetary Transactions (OMT) scheme.
The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.