The statement accompanying S&P’s upgrade of Irish government debt from A- to A is below the fold – though there is little of note in it bar the indication that a further upgrade is a possibility even though they have put the outlook at stable.
There are five more steps back to AAA --- A+, AA-, AA, AA+ and then AAA.
TweetStandard and Poors have upgraded Irish government bonds from BBB to A- with positive outlook. Their statement justifying the upgrade is below the fold.
TweetIn a brief assessment the ratings agency Fitch have affirmed the BBB+ view of Irish government bonds with a stable outlook.
Back in January Moody’s moved Ireland from Ba1 (“junk” status) to Baa3 (lowest grade of investment status). Standard and Poor’s have Ireland and the same level as Fitch, BBB+, but assign a positive outlook to their rating. Today’s statement from Fitch is below the fold.
TweetFitch Affirms Ireland at 'BBB+'; Outlook Stable
21 Feb 2014Fitch Ratings has affirmed the Republic of Ireland's Long-term foreign and local currency IDRs at 'BBB+' with Stable Outlooks. The issue ratings on Ireland's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB+'. The Country Ceiling has been affirmed at 'AA+' and the Short-term foreign currency IDR at 'F2'.
The rating of National Asset Management Ltd's (NAMA) guaranteed issuance has been affirmed at 'F2', in line with the sovereign rating.
KEY RATING DRIVERS
The affirmation reflects the following factors:Ireland successfully completed its three-year adjustment programme in December 2013. All quarterly fiscal targets of the Troika (EU, ECB, IMF) programme have been met, underpinned by strong policy commitment. Parallel with fiscal consolidation, Ireland has returned to market financing and has built up cash buffers equivalent of 13% of GDP by end-January 2014, including EUR3.75bn from a 10-year bond sale in January 2014.
Fitch forecasts a budget deficit of 4.8% of GDP in 2014, implying a balanced primary position, compared with a primary deficit of more than 9% of GDP in 2009 excluding bank recapitalisation. Nevertheless a further EUR2.0 bn of consolidation will be needed next year to reach a budget deficit below 3% of GDP, the precondition to exit the EU's Excessive Deficit Procedure (EDP).
Ireland's gross general government debt/GDP ratio may have reached around 124% in 2013, one of the highest among Fitch-rated sovereigns. The combination of high debt and modest medium-term growth potential implies that keeping debt on a declining path will require large primary surpluses for an extended period.
The acceleration of economic growth and larger than expected fall in unemployment in 2H13 are signs of a broad-based recovery. GDP growth could reach 1.6% in 2014 and 2.2% in 2015 as growth contribution from domestic demand will turn positive after five years of balance-sheet recession in the private sector. Fitch expects the current account surplus to remain around 4% of GDP in 2014-15, similar to 2013.
Post-crisis vulnerabilities remain in the banking sector, notwithstanding the improvement in economic conditions and the authorities' efforts to accelerate mortgage resolution.
Ireland has retained many of its structural strengths throughout the crisis. It is a wealthy, flexible economy and its per capita gross national income was USD35,100 in 2013, more than twice the 'BBB' median.
RATING SENSITIVITIES
The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could individually or collectively, result in a upgrade include:
- Greater confidence that the GGGD/GDP ratio will be on a firm downward trend over the medium term.
- Sustained, balanced economic recovery.
- Reduction in financial sector vulnerabilities, notably an improvement in banks' asset quality and profitability.The main factors that could lead to negative rating action are:
- Material divergence from the fiscal targets leading to GGGD/GDP ratio peaking higher and later.
- Additional recapitalisation needs of the financial sector by the Irish sovereign, for example in the context of the ECB's Comprehensive Assessment.
- Weaker economic performance resulting in a substantial deterioration of banks' existing loan portfolio.KEY ASSUMPTIONS
Fitch assumes that fiscal consolidation efforts will continue to ensure the exit from the EDP by 2015 in line with the government's stability programme and substantial primary surpluses will be maintained over the medium term, consistent with Ireland's medium-term objective.High public ownership in the banking sector implies a close bank-sovereign link, amidst the eurozone level progress towards banking union. Nevertheless Fitch assumes no further recapitalisation of the financial sector by the sovereign.
Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low.
Not a lot of talk of government bond yields this week but a quick look at the indicative five-year yield on Irish government bonds calculated here shows that the drop in yields that happen on January 20th (after the Moody’s upgrade) has been almost fully reversed for the bond maturing in October 2018.
The yield was around 1.80 per cent on Friday 17th of January and it dropped to close to 1.60 per cent after the Moody’s upgrade. As can be seen it has been edging back up since then and is now at 1.77 per cent. Much better than 14 per cent of course.
TweetAlthough 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.
Standard and Poors have changed their outlook on Ireland’s BBB+ rating from negative to positive. This in itself is not a very significant move. Far more attention will be directed to the Ba1 (outlook negative) currently assigned by Moody’s to Irish government bonds. This puts Ireland below investment grade or having ‘junk’ status.
The statement released by S&P is below the fold and details their opinion that last week’s announcement “supports medium-term fiscal consolidation.” It also discusses how the switch adds about 10% of GDP to their measure of the government debt as, unlike Eurostat, they include NAMA bonds in their gross debt figure. Their net debt figure also rises by the same amount as they view the NAMA-held assets as “illiquid”.
Read the full statement below.
TweetHere is an update of a previous table with the addition of EZ ratings from Canadian firm DBRS (Dominion Bond Rating Service). DBRS do not provide a rating for all EZ countries but their ratings can be important as shown below.
This Bloomberg article from July 2011 explains how the ECB uses the ratings from these four companies.
The ECB determines the size of the premium, or so-called haircut, it applies to government bonds on the basis of the best credit rating from four companies -- Standard & Poor’s, Moody’s Investors Service, Fitch Ratings and DBRS. DBRS currently rates Ireland at A, two steps higher than the grades of S&P and Fitch and four steps above that of Moody’s.
DBRS’s rating means the ECB applies a 3 percent haircut on fixed-coupon Irish bonds with a residual maturity of five to seven years and a 4 percent premium on paper that will expire in seven to 10 years. Bonds rated BBB+ to BBB-, like those of Portugal, incur premiums of as much as 9 percent, as does debt from Greece, which is accepted as collateral independently of its rating.
Last week’s confirmation by DBRS of the A(low) rating for Ireland meant we ‘dodged a bullet’ in the words of this Wall Street Journal post
Canadian rating firm DBRS Inc. just showed the little guy still matters. The fourth-biggest rating company downgraded Spanish and Italian government debt late Wednesday, and affirmed its stance on Irish bonds.
With the “big three” controlling around 95% of the global ratings market, DBRS doesn’t command the same attention. But when it comes to the euro-zone’s financially troubled countries, it should.
Because the European Central Bank listens to DBRS just as it does to the others. DBRS is one of the four ratings firms the ECB uses when deciding how much it charges investors for using sovereign bonds as collateral in exchange for loans.
Luckily for those keen to avoid shakeouts in euro-zone bond markets, DBRS still rates those governments in the “A” category, with an “A (low)” for Spain and Ireland only one notch into the area. Italy is three notches above at an “A (high).”
Cutting them below an A-rating level would have spurred the ECB to charge 5% more for using Spanish and Irish government bonds as collateral.
DBRS have Italy at “A” rather than “A(high) as stated in the article. Also the ECB’s collateral framework is set to be overhauled in September which may change the significance of these ratings.
TweetToday’s downgrade of Italian government bonds by ratings agency Moody’s was a little unexpected. Here is a table of the rating of all 17 eurozone members with the three main ratings agencies, Standard and Poors, Fitch and Moody’s.
The ratings classifications along the left hand side are used by S&P and Fitch (though they do give them different descriptions) while those on the right are used by Moody’s.
S&P have Ireland at the same ratings notch as Spain and Italy while with Fitch Ireland is one notch below Italy and is actually one grade above Spain. This relative ranking is not maintained by Moody’s which has below both (two notches below Italy and one below Spain).
The only other instance where there is not a consistent relative ranking across the three agencies is Malta’s rating with S&P. Both Fitch and Moody’s have Malta as least as high or above all of Estonia, Slovakia and Slovenia. S&P have Malta below all three.
Moody’s could, of course, come into line with the other two in the relative ranking of Ireland, Italy and Spain. However to do this, Moody’s would, of course, have to bring Italy and Spain to “junk” status as this is the only way they could have a rating equal to or below Ireland’s current Ba1 rating with them.
This could happen but the junking of either Italy or Spain would be a major event. Alternatively, Moody’s could upgrade Ireland to investment grade status but an increase in the sovereign bond rating of any eurozone country would be an equally noteworthy event.
There is little to suggest that such an upgrade is warranted unless it was to acknowledge that the initial downgrade to “junk” status was a bit hasty. And ratings agencies could never make a mistake, could they?
TweetFor the second time in a fortnight a ratings review has seen Irish government bonds hold their rating at BBB+. According to Fitch:
BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
The Fitch statement on the ratings decision begins
The affirmation of Ireland's sovereign ratings primarily reflects two factors:
- Whilst Fitch has reduced the score assigned to capture financing flexibility in its assessment of the credit profile of those eurozone sovereigns that have large fiscal financing needs and significant financial/economic imbalances, in Ireland's case its 'BBB+'/'F2' rating had already incorporated this lack of financing flexibility as demonstrated by it losing market access in 2010 .
- Ireland's progress with fiscal and structural adjustment under the IMF-EU programme. Notwithstanding the intensification of the eurozone crisis over the last months, on-track fiscal performance and the improvement of macroeconomic and financial fundamentals led to the decline of interconnected fiscal sustainability and financial stability risks and all programme targets have been met.
Not a lot to generate much reaction here though I must have missed “the improvement of macroeconomic fundamentals”. Economic growth? Inflation? Unemployment? There has been some stability but hardly enough to warrant description as an improvement. The full statement is below the fold.
TweetFor the second time since August, S&P has reaffirmed its BBB+ rating for Irish government bonds. BBB+ is two grades above junk status and is defined as “adequate capacity to meet financial commitments, but more subject to adverse economic conditions”. In August, though, the outlook was Stable, now it is Negative. That implies there is a one-in-three chance of a downgrade over the next two years.
Italy, Portugal and Spain all had two-notch downgrades. Italy has been moved to BBB+ and now stands alongside Ireland. Portugal, which previously had a BBB- lowest investment grade rating, now has a junk status grade of BB. Spain began at AA- and is now at A. As with Ireland the outlook on all of these is Negative. The last of the PIIGS, Greece, did not form part of the current review and remains at the low-junk CC grade and a disorderly default is a growing possibility.
A lot of the current S&P statement explaining the decision on Ireland deals with the general eurozone environment but there are some interesting country-specific elements. Two of these are:
1. All other things being equal, we view the government's fiscal consolidation plan as sufficient to achieve a general government deficit of around 3% of GDP in 2015.
2. We expect the general government net debt burden to fall to about 103% of GDP in 2015, having peaked at 109% in 2013. Our net debt estimates include the impact of the government's €64 billion (40% of GDP) in banking sector recapitalizations during 2008-2011 and €29 billion (18% of GDP) in debt issued by the National Asset Management Agency (NAMA) as of end-2011.
In August they were forecasting that their measure of net debt would peak at 110% of GDP in 2013. That has now being reduced to 109% of GDP (possibly as a result of the double-counting error in the Department of Finance.) The 103% net debt/GDP for 2015 is unchanged. On the general eurozone response to the crisis they state:
1. In our opinion, the political agreement [the fiscal compact of December 9th] does not supply sufficient additional resources or operational flexibility to bolster European rescue operations, or extend enough support for those eurozone sovereigns subjected to heightened market pressures.
2. [.] we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues.
The full text of the S&P statement is below the fold.
TweetYesterday, the Canadian rating agency, Dominion Bond Rating Service or DBRS downgraded Ireland from A to A(low). The ratings used by DBRS can be viewed here. Just six weeks DBRS had confirmed Ireland A rating and suggested it was “unlikely to downgrade Ireland”.
However the A(low) rating from DBRS is four grades above speculative or "junk" status and remains Ireland's highest rating among the four leading ratings agencies. As we know both S&P and Fitch have Ireland three notches above junk with their rating of BBB+, while Moody's lowered Ireland's rating one notch below the junk status threshold to BB+ in early July.
We previously looked at S&P’s recent statement on Ireland and their forecasts of Ireland’s “net government debt including NAMA obligations”. To make comparisons different DBRS focus on “gross government debt excluding NAMA” but they have the following to say:
In our revised baseline scenario, Ireland’s gross general government debt peaks at 120% of GDP in 2013 and gradually declines thereafter. This excludes NAMA bonds and its associated assets.
Although difficult to draw exact comparisons there is agreement that Ireland’s debt ratios will peak over the next few years. The full DBRS statement can be read here.
One benefit of maintaining the A rating with DBRS on Irish government bonds for our ailing banks is highlighted here.
When Moody’s downgraded Ireland to junk status on the 12th of July their statement clearly stated that the basis for the decision was the belief that “private sector creditor participation will be required as a precondition for additional support” from the EU/IMF.
When emerging from the crisis summit nine days later Michael Noonan clearly stated that there would be no such pre-conditions as long as Ireland was meeting the terms of the original agreement. Moody’s themselves admit that Ireland has met, and in some cases exceeded, the targets laid out in the EU/IMF programme. In the light of recent developments the Moody’s downgrade to junk status does not seem warranted.
In fact if Moody’s were to listen to the views of Fitch just a few days earlier they may not have gone as far. In a comment the following is stated.
TweetIreland is unlikely to default on its debt, Chris Pryce, a sovereign credit analyst with Fitch Ratings, said today.
“Our ratings, which are investment grade reflect the view that we certainly don't believe that Ireland is likely to default,” Pryce said in a telephone interview today. Fitch has a BBB+ rating on Ireland.
After a day of speculation Standard and Poor’s have officially downgraded US government debt from the top rating AAA to AA+. Here is the full list of S&P ratings. Everything from BBB- up is considered investment grade, with ratings from BB+ down given speculative or junk status.
Yesterday, S&P confirmed Ireland investment grade status of BBB+. Here are the bullet points that accompanied the S&P statement. (The full statement is reproduced below the fold.)
There was some debate that the figures used by S&P t0 justify the downgrade were incorrect. S&P came out and admitted that the numbers were wrong but argued that the revision did not change their overall view. See clarification statement here.
The full S&P statement on the US downgrade is below the fold.
TweetAfter a year of almost unrelenting increases Irish government bond yields have been falling for the past two weeks. The recent drop only goes some way to offsetting the increases that took place over the past year. Here is the 10-year bond yield constructed by Bloomberg.
Although the recent drop has been rapid, the 10-year yield is only back to where it was at the end of April. There is still a long way to go before these yields give any indication that Ireland can return to raising funds on bond markets.
That would require a drop to around 5% or so. As it is we have yet to drop below 10%, but dropping through this level is something that could happen in the next day or so. Trading today has seen the yield hover around 10.2%.
The movements in Irish bond yields are running counter to all of other fellow PIIGS (Portugal, Italy, Greece, Spain) who are continuing to see rising yields, albeit only moderately. The actual yields and yesterday’s closing prices off all Irish government bonds can be seen in this daily report from the NTMA.
[UPDATE: The Irish ten-year yield produced by Bloomberg finished the day at 10.024%. Chart here. Getting below 10% is not far away. It finished as a reasonably good day for the PIIGS with only Greece seeing rising yields on the day.]
The news on Ireland today was further boosted by a statement from S&P this morning confirming our BBB+ investment grade rating for Irish government bonds with a stable outlook. BBB is two notches above speculative or junk status and is defined as “adequate capacity to meet financial commitments, but more subject to adverse economic conditions”.
Here is the S&P view of Ireland’s public debt:
We expect Ireland's net general government debt burden will peak at about 110% of GDP in 2013, including NAMA's debt obligations, before falling to about 103% of GDP in 2015. Excluding NAMA obligations, we expect net debt to peak at around 97% of GDP in 2014.
This is a long way from what some domestic commentators are trying to predict. The full S&P statement is reproduced below the fold and in general it is reasonably positive.
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