New York, May 16, 2014
Moody’s Investors Service has today upgraded Ireland’s rating by two notches to Baa1 from Baa3. At Baa1, the outlook is stable. Concurrently, the short-term rating has been upgraded to P-2 from P-3.
The key drivers of the upgrade of Ireland’s rating are the following:
- A step change in future debt levels. Moody’s expects that the recent pick-up in Ireland’s growth momentum will speed up ongoing fiscal consolidation and put the government’s debt metrics on a steeper downward path than previously anticipated, leading to a significantly improved outlook for Ireland’s medium-term public debt trajectory.
- Very sharp reduction in off-balance sheet exposures. The recovery in the Irish property market has resulted in a considerable recent reduction in government contingent liabilities, due both to the accelerated asset sales of Ireland’s National Asset Management Agency (NAMA) and to the disposal of the Irish Bank Resolution Corporation (IBRC) portfolio.
- Improved credit position relative to peers. Compared to other Baa-rated euro area sovereigns, including Italy (Baa2 stable) and Spain (Baa2 positive), Ireland’s credit profile is recovering more quickly from the euro area debt crisis as a result of its economy’s dynamism and growth prospects. This assessment informs the two-notch upgrade, repositioning the rating at the top of Ireland’s scorecard-implied rating range.
However, Ireland’s credit profile and rating remain constrained by the country’s high public debt level, still-sizeable fiscal deficits and significant banking sector risks, including a high stock of non-performing loans. These negative rating factors are partly offset by Ireland’s considerable institutional and economic strengths as well as the government’s significant cash balance, which insulates it from liquidity pressures in the short to medium-term.
In a related rating action, the ratings on the debt of NAMA, which is fully and unconditionally guaranteed by the Irish government, have been upgraded to Baa1/P-2 with stable outlook, the same ratings and outlook as the government.
In addition, Ireland’s foreign and local-currency country ceilings for long-term debt and deposits have been raised to Aa3 from A2. The country ceilings for short-term foreign-currency debt and deposits are affirmed at P-1. These ceilings reflect a range of un-diversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. Ireland’s ceilings also incorporate the currently very low risk of euro area exit and redenomination, consistent with Moody’s treatment of other sovereigns in a currency union. These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.
RATIONALE FOR THE UPGRADE TO Baa1
The first driver behind the upgrade of Ireland’s debt ratings relates to the significantly improved outlook for Ireland’s medium-term debt trajectory, given the pick-up in growth momentum in the last few months. Moody’s expects Ireland’s economy to grow considerably faster than the euro area average over the near to medium term. Both coincident and leading indicators from January through April 2014 show that economic activity is gathering pace and that the one-off factors that held back export growth in 2012-13 are waning. Moreover, domestic demand is now accelerating, led by a broad-based recovery in gross fixed investment but also by a revival in private consumption spending despite households’ high debt overhang. Consumer confidence is gradually being restored thanks to robust employment trends and the stabilization of the housing market.
Faster growth will support ongoing fiscal consolidation and put the debt on a firm downward trajectory, which was one of Moody’s forward-looking criteria for further upgrades after the rating was upgraded to Baa3 in January 2014. The budget deficit shrank by 30% compared to a year earlier in the first four months of 2014, as government revenues increased beyond budget forecasts and the drop in unemployment (by 14% last year alone) helped to lower government outlays on social benefits. These early results put the government finances on track to realize the planned deficit of less than 5% of GDP this year. In 2015, the government expects it will need 1.2% of GDP in additional fiscal tightening to achieve its goal of a deficit under 3% of GDP, which once achieved would allow Ireland to move out of the EU’s Excessive Deficit Procedure for the first time since 2008.
The second driver for the upgrade of Ireland’s rating is the significant recent reduction in government contingent liabilities as a consequence of the recovery in the Irish property market. It is now highly likely that all of the marked-down assets taken over by NAMA from the commercial banks in 2010-11 will be able to be sold without ever coming onto the government’s balance sheet. This year NAMA has accelerated the sale of its assets, which are predominantly located in prime urban areas, and is using the proceeds to pay down another EUR7.5 billion in debt. This will bring the debt that NAMA has paid off since inception to EUR15 billion by year-end 2014, or half the debt NAMA had originally issued to purchase the devalued bank assets. At this pace, NAMA officials predict they will have sold off nearly all of its assets by the end of 2016 and thus be able to close its doors two years before the 2020 target date.
Also notable is the fact that the approximately EUR13 billion portfolio of mainly property assets created from the February 2013 liquidation of the IBRC (formed by the merger of the nationalised Anglo Irish Bank and the Irish Nationwide Building Society) was sold without having to be transferred to NAMA’s balance sheet, as had been expected only a few months ago. The ability to sell the entire portfolio (i.e., without recourse to either NAMA or the government) with a profit is another positive development that has become clear since the upgrade of Ireland to Baa3 in January.
The third driver for today’s two-notch upgrade is that Ireland’s credit profile is recovering more quickly from the euro area debt crisis as a result of its economy’s dynamism and growth prospects compared to other Baa-rated euro area sovereigns, including Italy (Baa2 stable) and Spain (Baa2 positive). When combined with our expectation that Ireland will meet or exceed its future fiscal targets, as it has in recent years, its growth trajectory should translate into a more significant debt-to-GDP decline than its peers. Hence, Moody’s has repositioned Ireland’s rating at the top of its scorecard-implied rating range of Baa1 to Baa3.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on Ireland’s Baa1 rating reflects evenly balanced upside and downside risks.
WHAT COULD CHANGE THE RATING — UP/DOWN
Upward pressure would develop on Ireland’s government rating if (1) the government continues to comply with its fiscal consolidation targets, leading to significant improvement of government debt affordability as measured by government interest payments over revenues; and (2) the three major domestic banks regain profitability and reduce their combined non-performing loan ratio, further lowering the government’s contingent liabilities from the banking system.
Ireland’s government rating could be downgraded or a negative outlook assigned if (1) the country’s fiscal consolidation process falters and the deficit fails to drop below the 3% of GDP mark in 2015; or (2) the finances do not achieve a structural balance (in accordance with Ireland’s Medium Term Objective agreed with the European Commission) by roughly 2017-18, particularly if the debt ratios were to climb again above 120% and show no signs of leveling off. Additional drivers of downward credit pressure would be an increased risk of contagion to stress elsewhere in the euro area, or in the unlikely case that contingent liabilities from NAMA and/or the banking system in excess of roughly EUR10 billion are transferred to the government’s balance sheet.
GDP per capita (PPP basis, US$): 39,547 (2013 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.3% (2013 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.4% (2013 Actual)
Gen. Gov. Financial Balance/GDP: -7% (2013 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 6.6% (2013 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Moderate level of economic resilience &Default history: No default events (on bonds or loans) have been recorded since 1983.
On 14 May 2014, a rating committee was called to discuss the rating of the Ireland, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially increased. The issuer’s fiscal or financial strength, including its debt profile, has materially increased. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. Other views raised included: The issuer’s institutional strength/framework, have materially increased.