Friday, January 27, 2012

Fitch keeps Ireland at BBB+

For 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.

The strong political support behind the multi-year fiscal consolidation plan and the broader public acceptance of its necessity are key supports to the adjustment process. According to preliminary data, the 2011 deficit-to-GDP ratio was better than the 10.6% target set in the IMF-EU programme with current official estimates suggesting the deficit came in at just under 10%. Fitch believes the 2012 target of 8.5% is attainable, not least due to the lowering of the interest rate on the EU portion (a total of EUR 40.2bn by 2013) of the official loans.

Export-driven recovery characterised the first half of 2011. While domestic demand is still contracting, the flexibility of the Irish economy, in particular the cut in nominal wages and prices resulting in a sharp improvement of competitiveness, helped to take advantage of strong external demand in early 2011.

Overall, financial stability concerns have receded following the PCAR exercise in March 2011. Market confidence has increased in Irish financial institutions, as evidenced by deposit stabilisation in H211 following previous sharp declines, successful raising of private capital by the Bank of Ireland and wholesale funding transactions. Following the public recapitalisation of the sector by EUR63bn, the capital adequacy ratios of the three largest banks are among the highest in the eurozone, providing a sizeable buffer for the expected losses. However, downside risks remain - non-performing loans are still rising, property prices have yet to reach a bottom and low mortgage foreclosure rates suggest further adjustment lies ahead.

Nevertheless, significant external headwinds persist. The Negative Outlook reflects the exposure to the economic downturn of major European trading partners, a key concern given the export-oriented growth model of the Irish economy, and the adverse impact of heightened eurozone financial tension on Irish financing conditions. In particular, the timing and interest rate level of the sovereign's return to market financing remains uncertain, although the recent bond switch aiming at smoothing the maturities between 2014 and 2015 is an encouraging sign.

Contagion from further intensification of the eurozone crisis or a material slippage of the fiscal consolidation path, either due to looser fiscal policy stance or a significant deterioration of the growth trajectory, could lead to a negative rating action. On the contrary, the successful implementation of the IMF/EU programme, a return to sustainable economic growth, and the moderation of the eurozone crisis would stabilise the rating Outlook.

The legislative process of the adoption of the fiscal compact represents a new and country-specific risk for Ireland. The Irish authorities may be required to hold a referendum on the fiscal compact. In light of the initial Irish 'No' to the EU Treaty in the June 2008 referendum, Fitch finds the probability of another rejection non-negligible. The uncertainty that would be created by another such 'No' vote would put further pressure on the rating.

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