Friday, July 12, 2013

S&P on Ireland

Although the change itself is not significant, the statement accompanying S&P’s adjustment of their outlook on Irish government debt from stable to positive is worth a read.  The statement is reproduced in full below the fold.  One of the more telling parts is the very last paragraph:

On the other hand, if the Irish economy remains sluggish, asset prices depressed, and debt reduction slow--or if banks are unable to reach NPL reduction targets--the ratings are likely to stabilize at the current level.

So even in the adverse case it seems that S&P would not bring the current BBB+ rating down.  In the S&P scale this is three notches above “junk status”.  From an Irish perspective the Moody’s Ba1 “junk status” rating with a negative outlook is the most notable and they have given no indication of a change, though this headline from the London Evening Standard did require a double take. It has since been rectified but is still wrong.  Anyway, S&P’s reasoning on their outlook change can be read below the fold.

London Evening Standard


  • In our view, there is a more than one-in-three probability that Ireland could over-achieve its fiscal targets and reduce its government debt
    faster than we currently expect.
  • We are therefore revising our outlook on the long-term ratings on Ireland to positive.
  • We are affirming our 'BBB+/A-2' long- and short-term foreign and local currency sovereign credit ratings on Ireland.

LONDON (Standard & Poor's) July 12, 2013--Standard & Poor's Ratings Services today revised the outlook on the long-term rating on the Republic of Ireland to positive from stable. At the same time, we affirmed our long- and short-term foreign and local currency sovereign credit ratings at 'BBB+/A-2'.

The outlook revision reflects our view that Ireland's general government debt burden is likely to decline more rapidly, as a percentage of GDP, than we had previously expected. This is due to sustained budgetary consolidation, stabilizing domestic demand, and higher receipts from government asset sales. We base our expectation of improving budgetary performance on implemented cuts to the public sector wage bill, reduced interest expenditure as a consequence of the promissory notes exchange completed earlier in 2013, and a steady recovery in tax receipts. Since the start of the EU/IMF program in 2010, Ireland has not deviated from its stated fiscal goals.

Based on our current growth and fiscal assumptions, we expect net general government debt to peak at 122% of GDP in 2013 but to decline to 112% by 2016. Our estimate of Ireland's gross and net general government debt includes National Asset Management Agency (NAMA) obligations issued to purchase distressed assets from participating Irish banks at a discount. However, until these are sold, NAMA's loan assets are not considered liquid assets in our estimate of net general government debt. As a result, Ireland's net general government debt could reduce faster than we currently expect if NAMA monetizes its loan assets more rapidly, resulting in either repayment of its obligations or further accumulation of cash. The Irish government has pre-financed itself for 2014: we estimate the exchequer had a cash balance of €26.2 billion (15.6% of GDP) at end-June 2013. We also assess contingent liabilities from the financial sector, which are below 30% of GDP, as "limited", under our criteria.

The strong consensus among the country's largest political parties--for fiscal consolidation and policies aimed at economic flexibility, competitiveness, and openness--supports Ireland's policy and institutional effectiveness. In our opinion, under the IMF/EU bailout program, Ireland's government has improved the regulatory and legal framework.

Ireland's economic recovery is under way. Given still-weak external demand and Ireland's exports exceeding 100% of GDP, we expect growth to remain slow in 2013 and 2014. Nevertheless, Ireland's domestic economy is showing signs of stabilizing. Unemployment has started to decline while private sector employment numbers are improving. The seasonally adjusted standardized unemployment rate declined to 13.6% in June 2013 from a peak of 15.1% in early 2012. We also expect house prices to bottom out in 2013. We believe there is upside potential for Ireland to recover more rapidly, should external demand recover. We are also of the opinion that Ireland's potential growth rate is greater than 2%, benefiting from its favorable demographics, its openness, and its labor and product market flexibility.

Ireland remains vulnerable to external financing risks despite the current account being in surplus since 2010. Short-term debt by remaining maturity remains well above 100% of current account receipts (CARs). Because there are many international financial companies in Ireland, its external statistics are distorted by the large asset and liability positions of these entities. In our external debt analysis, we focus on the government's and Irish banks' external
positions as they are the largest external debtors in the economy. While the government's international capital markets access has improved and the maturity extension of its European Financial Stability Facility and European Financial Stabilisation Mechanism official debt (as agreed in April 2013) has reduced its near-term financing needs, the banking sector has only recently re-entered the capital markets and issued unsecured debt. Given the uncertainties related to global liquidity, we view Ireland's private-sector access to external funding as still fragile.

Ireland's banking sector still has very high levels of nonperforming loans (NPLs), at above 25% of the domestic loan book, and rising. Most notably, mortgage arrears continue to increase (13.5% of accounts are more than 90 days past due). Recent government legislation has removed legal obstacles to repossession and introduced a new personal insolvency regime. A revised code of conduct that governs how lenders must treat struggling mortgage borrowers has also been introduced. Given these recent developments, we expect banks will now move more rapidly to try and resolve cases of long-term arrears following targets set by the central bank, which will likely lead to a large number of foreclosures in buy-to-let properties. Partly as a result, we do not expect Ireland's larger banks to return to profitability in 2013 and, in some cases, probably not until 2015. We also believe they will remain reluctant to lend to the domestic economy.

The positive outlook reflects our view that there is a more than one-in-three probability that we could raise our long-term ratings on Ireland in the next two years.

We could raise our ratings on Ireland if its growth performance suggests that fiscal outturns will surpass our forecasts or that banks' asset quality will materially improve.

On the other hand, if the Irish economy remains sluggish, asset prices depressed, and debt reduction slow--or if banks are unable to reach NPL reduction targets--the ratings are likely to stabilize at the current level.

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