Friday, February 21, 2014

Fitch on Ireland

In 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.


Fitch Affirms Ireland at 'BBB+'; Outlook Stable
21 Feb 2014

Fitch 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.

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.

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.

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.

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