Ireland Debt Outlook Raised at S&P on Impact of Budget Cuts

Standard & Poor’s raised its outlook on Ireland’s sovereign rating, saying the government may exceed its targets for debt reduction as the economy recovers.

The ratings company lifted the outlook on the nation’s BBB+ grade to positive from stable, it said in a statement today. There is a one-in-three chance the rating will be raised in the next two years.

“Ireland could over-achieve its fiscal targets and reduce its government debt faster than we currently expect,” S&P said. “Ireland’s economic recovery is under way.”

S&P also affirmed Germany’s AAA rating today with a stable outlook. That judgment and its view on Ireland contrasts with the company’s decision earlier this week to cut its rating on Italy’s debt to BBB from BBB+, with a negative outlook, because of that country’s continued recession.

Of the three major ratings companies, S&P now has the most positive outlook on Ireland. Fitch Ratings has the nation on BBB+ rating with a stable outlook, while Moody’s Investors Service has it at non-investment grade and a negative outlook. Investors often ignore ratings, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.

While today’s S&P revision is “good news” for Ireland, Moody’s “stubbornness in holding on to its sub-investment grade rating remains an unhelpful overhang on the sovereign” and its banks, Philip O’Sullivan, an economist at Investec Plc in Dublin, said in a note.

Fiscal Program

The Irish government is pressing on with budget savings after needing a bailout in 2010 and is also working on a plan to recoup some of the money it plowed into failing lenders from the euro area’s backstop fund. Ireland’s Finance Ministry said on its Twitter feed that S&P’s improved outlook highlights the success of the country’s fiscal-consolidation program.

The National Treasury Management Agency said the move acknowledges the country’s improved access to capital markets and fiscal situation. Ireland is aiming to be the first euro-area country to exit a bailout at the end of the year.

S&P said government debt will peak at 122 percent of gross domestic product this year and decline to 112 percent by 2016. It said the “strong consensus” among the country’s largest political parties for fiscal consolidation “supports Ireland’s policy and institutional effectiveness.”

Outlook Risks

While the economy is recovering, S&P said weak foreign demand means growth will remain slow this year and next and risks to the outlook remain. Banks still have “very high levels” of non-performing loans and the country’s access to external funding is “fragile.”

Economic data for the nation has been mixed in recent weeks. The Irish economy slipped back into recession in the first three months of the year to mark a third consecutive quarter of contraction. In contrast, tax revenues exceeded the government’s target by 1 percent in the first half, and the nation’s budget deficit declined.

The yield on 10-year Irish bonds was 3.9 percent today. While it’s up from a low of 3.41 percent in May, it reached a peak of 14.219 percent in 2011.

Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by Standard and Poor’s. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.

On Germany, S&P said today that it predicts the economy will maintain “steady” growth in the medium term.

“The stable outlook on our long-term rating on Germany reflects our expectation that its public finances will continue to withstand potential financial and economic shocks and that consensus in favor of prudent economic policies will remain,” S&P said.

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