Friday, January 16, 2009

Our true credit ratings

The credit ratings agency, Fitch, has downgraded all Irish banks closer to the junk-bond status:
• Allied Irish Bank and Bank of Ireland went down a mile from AA- to A,
• Anglo fell two stories to A-,
• Irish Nationwide, having fallen from BBB+ to BBB-, is now just one inch away from being valued as pure junk,
• IL&P sits pretty (thanks to its insurance arm) at A+, down from AA, while
• EBS is now up for a review of its A- status.

All moves were triggered by Fitch’s (somewhat belated) realization of “the deteriorating economic environment, an abrupt contraction in forecasts for Irish economic growth in 2009, rising unemployment and a worsening outlook for commercial property", that threaten earnings and loan book losses.

Clearly, Fitch's folks have not been listening to
• the increasingly irrational pronouncements from our Taoiseach in Tokyo about the imminent return of the age of prosperity and the bottoming out of the housing market in 2009 (made on the day when RGE Monitor pushed back expected date of the US housing market bottoming out to 2010 (see here), as did the UK);
• the oblivious statements from the Exchequer about the low-debt competitive economy that is Ireland Inc; and
• those voices of the Irish knowledge economy pioneers that RTE’s Wednesday Prime Time programme unearthed (how can one fail to see the bright future for the country covered by fish farms with a perpetuum mobile machines providing zero-cost energy? As we speak, I am quite confident Eamon O'Cuiv is seeking state funding for a Galetacht company to produce tin whistles for export, while SFI is funding the path breaking research in alchemy).

But Fitch did swallow some propaganda junk from our leaders. Chris Pryce from Fitch Ratings told the UK Telegraph that “Ireland had shown great courage by facing up to the full implications of the global crisis earlier than others. "We're very impressed by the vigour of the Irish government," he said.”

What courage? What vigour? A lifeless cabinet limping from one crisis statement to another? What 'facing up'? We have a PM who finds nothing better to do than attack American foreign policy and the UK monetary authorities in between lunches and receptions in Tokyo? A Deputy PM who is incapable of a single meaningful thought on this crisis on an hour long program on the national broadcaster devoted to it?

Next stop for the country? An honest reappraisal of our sovereign debt ratings to reflect the fact that our actual debt ratio to committed obligations under the banks guarantee and recapitalization schemes is about 1:5, yielding a total expcted Exchequer exposure of ca 120-150% of GDP should impairment charges at the banks reach UK's 1990s levels, implying that Ireland’s own bonds cannot be traded at the prices far off the banks bond levels.

Of course, not willing to follow S&P’s delirious review that left Ireland’s sovereign rating at AAAa week ago (here) and Fitch’s yesterday’s failure to mention the execpected impact of their banks downgrade on Irish sovereign debt, the markets have already started the repricing process. Our five-year credit default swaps are being quoted at a 250bps, roughly 66bps above Monday levels.

We are now at par with Greece, while enjoying a much more rapid deterioration in the economy and public finances, implying our debt rating should be at or below their A-/A-2 range.

PS: at the rate our CDS spreads deteriorate, it is worth a mention that our NTMA is about the only properly functioning branch of the State.

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