Monday, February 11, 2013

S&P on Ireland

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.

Ireland Outlook Revised To Stable On Promissory Notes Exchange; 'BBB+/A-2' Ratings Affirmed

Publication date: 11-Feb-2013 12:51:43 EST

  • In our opinion, the exchange of promissory notes, which the Irish government had provided to Irish Bank Resolution Corporation, for long-dated Irish government bonds, should reduce the government's debt-servicing costs and lower refinancing risk.

  • We believe the success of the exchange increases the likelihood of a full return by Ireland to private financing and, therefore, of Ireland successfully exiting the EU/IMF bailout program, at the end of 2013.

  • We are therefore revising our rating outlook on Ireland to stable from negative.

  • We are affirming our long- and short-term foreign and local currency sovereign credit ratings on Ireland at 'BBB+/A-2'.

LONDON (Standard & Poor's) Feb. 11, 2013--Standard & Poor's Ratings Services today affirmed its long- and short-term foreign and local currency sovereign credit ratings on the Republic of Ireland at 'BBB+/A-2'. We revised the rating outlook to stable from negative.

The outlook revision reflects our expectation that the exchange of promissory notes for longer-term government bonds significantly reduces the Irish government's debt-servicing costs and refinancing risk, and supports medium-term fiscal consolidation. By improving the government's debt-maturity profile, the transaction also increases the prospects of Ireland leaving the EU/IMF bailout program as planned at the end of 2013.

The Irish government's announcement involves liquidating the Irish Bank Resolution Corporation (IBRC) and transferring its assets (including the promissory notes) to the Central Bank of Ireland (CBI), thereby paying down the Emergency Liquidity Assistance that had been financing the CBI's loan book. The assets would then be transferred from the CBI to the balance sheet of National Asset Management Agency (NAMA) in exchange for new government-guaranteed NAMA bonds, which will be held as an asset at the CBI.

While we expect the liquidation of IBRC will modestly weaken the general government fiscal balance in 2013, we project savings on interest payments on the promissory notes will narrow the Irish government's fiscal deficits in 2014 and 2015 by at least 0.6% of GDP--probably somewhat more--given that delayed refinancing reduces compound interest payments. In addition, the potential for higher dividend payments from the CBI over the medium term could improve the reported headline general government deficit during 2014-2016.

We believe that the arrangement will, however, effectively add an amount equal to about 10% of GDP to the government's existing explicit debt burden, as our criteria define this term. This is because we will include the new NAMA bonds, issued in exchange for IBRC assets, as part of our calculations of general government debt (whereas Eurostat does not include the bonds). Our inclusion of the NAMA bonds in Ireland's general debt total reflects our view that the sovereign-guaranteed debt is equivalent to government debt, in all cases, under our accounting methodology. At the same time, the arrangement will not increase the overall level of public sector debt. Under our methodology for estimating net general government debt, we do not net out NAMA assets from Ireland's general government debt burden as we view these as illiquid. Nevertheless, we anticipate that, as NAMA disposes of its portfolio of distressed property assets, the proceeds will be used to pay down government liabilities such as the NAMA bonds. Paydown should improve Ireland's general government debt ratio in both gross and net terms.

The ratings reflect our view of the government's commitment to stabilizing Ireland's public finances, as well as the high wealth, openness, and resilience of the Irish economy which we assess as more flexible than most of its eurozone peers. These strengths are moderated, however, by Ireland's still-substantial fiscal deficits, heavy public and private debt burdens, and the weaknesses of its financial system. In our view, these factors collectively reduce Ireland's growth prospects as well as its capacity to respond to material economic and financial shocks.

The stable outlook balances our view of Ireland's progress toward rebalancing the economy and consolidating its fiscal position against the prevailing downside risks we see to its financial sector stability and its already-highly-leveraged balance sheet, as well as what we view as the uncertain growth prospects for its domestic economy.

We could revise the outlook to negative or lower the ratings if the government fails to comply with the EU/IMF program. In our opinion, this could jeopardize the government's progress in regaining market access and consequentially complicate negotiations for a new program. We could also lower the ratings if the government were not able to access the capital markets sufficiently to meet its 2013 funding needs, or if economic growth slows amid a weaker
external environment.

We could consider raising the ratings on Ireland if the government sustains its fiscal strategy, enabling it to pay down its general government debt and reduce refinancing risks. If the government can sell its sizable equity position in the domestic banking system to nonresident investors, this could also help reduce debt, which would be positive for the ratings.

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