Saturday, January 18, 2014

18/1/2014: Moody's Upgrade for Ireland

Moody's Investor Services upgraded Irish sovereign ratings tonight in a move that was expected by the analysts ( and was overdue.

Moody's release on this is here:

Key takeaways from the release:

  1. Rationale for the upgrade: "The two main drivers for the upgrade are: (1) The growth potential of the Irish economy, which together with ongoing fiscal consolidation is expected to bring government debt ratios down from their recent peak; (2) The Irish government's exit from its EU/IMF support programme on schedule, with improved solvency and restored market access.
  2. On growth potential: "Moody's expects a stronger expansion of net exports in the next few years as the negative impact lessens from the expiry of key pharmaceutical patents and as Ireland's major trading partners register more robust growth. Improved competitiveness ...since the 2009 recession, contributing to the shift from large current account deficits before the crisis to the current surpluses. Moreover, there are signs of a revival in domestic demand as household savings rates come down from historic highs. Foreign direct investment also remains extremely strong, attracted by Ireland's innovative and flexible labour force, and the housing sector appears to have stabilized."
  3. On fiscal side: "The second driver of the upgrade is the Irish government's exit from its three-year economic adjustment programme in mid-December 2013. Its ability to do so without a precautionary credit line reflects that the government's reform agenda stayed largely on track throughout the programme, despite weaker than expected domestic and external economic conditions. The government regularly outperformed quantitative fiscal goals, which helped it regain and retain market confidence. Similarly, Moody's expects that Ireland will be able to address its excessive deficit (i.e. bringing it sustainably below 3% of GDP) by 2015."
Readers of this blog would know my views as to the risks associated with some aspects of the above assessments. However, the risks are unlikely to play out over the next 12 months horizon and are not carrying significant probability to derail overall low-growth recovery trend. So, in my view, Moody's is justified in shifting ratings up to Baa3 from Ba1.

On risks side, moody's cite: "That said, the clean-up of the banking system's non-performing loans is still in the early stages. In 2013, the Central Bank of Ireland (CBI) used its increased powers to establish a schedule requiring banks to resolve mortgage and SME loan arrears on a sustainable basis. The CBI is also demanding that banks strengthen collection efforts from customers who are able to pay. In the meantime, however, these mortgage resolutions are likely to increase foreclosures, impairing profitability and potentially dampening the housing market recovery."

Agree with their view, though other risks also exist, beyond the mortgages resolution process and banking sector performance.

Nice bit about the upgrade - it comes after Moody's delayed any changes to Portugal's ratings last week, a move that was interpreted by some analysts as a signal that the agency could have left Ireland's debt ratings unchanged as well.

My view on the ratings is that Ireland is moving into the same category of debt as Belgium (aptly, along with Belgium's longer term growth trajectory of ca 1.5% pa and Belgium's long-term struggle of shifting out of the 100% debt/GDP ratio for sovereign debt). It is a net gain for us, given the scale of the crisis we are starting to recover from.

Note: a H/T & thanks to Conrad Bryan @conradbryan and Dave Ryan @MailPidgeon for alerting me to Moody's action this late at night.

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