Thursday, August 18, 2011

DBRS downgrades Ireland to A(low)

Yesterday, 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.

Ireland 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.

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