Ireland – out of the trash bin
Moody’s Investors Service has upgraded Ireland to investment grade, handing the government a major post-bailout boost and opening its already sought-after debt to investors prohibited from buying junk-rated paper.
It is the latest in a run of good news for Ireland, which became the first euro zone country to complete a bailout, made a storming bond market return last week and has an economy that is picking up steam.
Moody’s, which was the only rating agency to class Irish government debt as “junk”, raised it to Baa3 from Ba1 with a positive outlook, citing the economy’s growth potential and restored market access as the main drivers.
“They undertook the fiscal consolidation and structural reforms in the (bailout) program with great seriousness. It really was their determination to succeed that helped them to both regain and retain investor confidence,” Kristin Lindow, Moody’s analyst for Ireland, told Reuters.
“It shows that meeting and exceeding criteria is very helpful for regaining market confidence.”
Moody’s, which nudged up its outlook on Ireland to stable last September, downgraded the country’s banks last month and said on Friday that a cleanup of non-performing loans that is still in the early stages would likely impair profitability.
However, Lindow said Moody’s does not expect the government will have to provide much if any additional capital to the banking system following an upcoming European stress test.
The upgrade comes as the economy shows signs of bettering two years of scant growth, with house prices on the rise, the jobless rate falling to 12.5 percent from a 2012 peak of 15.1 percent and GDP growth of 2 percent expected this year.
Despite having a debt and budget deficit among the highest in Europe, Ireland has kept investors on its side by consistently hitting fiscal targets and has largely brushed aside Moody’s negative stance since resuming borrowing two years ago.
At the height of the euro zone crisis in July 2011, Moody’s cut Ireland’s rating to Ba1, one notch below former financial market pariah Colombia, and that prohibited large, mainly Asian-based ratings-sensitive funds from touching Irish debt.
Restoring it to investment grade allows some sovereign wealth funds and Asian central banks to rejoin the scramble for Irish paper where yields on 10-year debt have fallen below 3.5 percent from a mid-2011 high of 15 percent.
With such funds able to place orders in blocks of some 300 million to 500 million euros at a time, their return would have a big impact at auctions set to resume at a modest pace this year when 500 million to 1 billion euros are likely to be offered.
“This is a better-than-expected result for Ireland, to get the outlook changed to positive is an added bonus,” said Ryan McGrath, a bond dealer at Cantor Fitzgerald.
“What it means on Monday morning is that yields are going to trade lower. Yields have come incredibly far, but I think there is room to tighten further versus the core. What it does in the year going forward is it opens up a new investor base.”
Market participants see ratings momentum moving Irish debt further away from fellow peripheral countries such as Spain and Italy, and towards France and Belgium, sometimes described as members of the euro zone’s “soft core”.
The head of Ireland’s debt agency, John Corrigan, said in a statement that the shift in outlook gave a positive context for future rating reviews.
Fitch, which rates Irish debt three notches above junk status at BBB+ with a stable outlook, is next in line to give an update in a month’s time. S&P lifted the outlook on its BBB+ rating to positive last year and will review it again in June.
New EU rules require credit agencies that operate in Europe to lay out the dates on which they review a country’s rating.
S&P decided against downgrading Portugal’s credit rating earlier on Friday and removed it from Creditwatch negative, while Fitch affirmed Netherlands at AAA, keeping its outlook at negative.
“Today’s upgrade will have benefits for the economy as a whole by putting downward pressure on the price of credit for companies and organisations who are reliant on the markets for funding,” finance minister Michael Noonan said in a statement. Source: Reuters.