Moody’s Sees Potential for Irish Ratings Outlook to StabilizeFinbarr Flynn
Moody’s Investors Service Inc. said there is potential for Ireland’s ratings outlook to stabilize by the end of next year should the euro area’s economy recover.
“We expect that the euro-area economy will begin to grow again in the second half of the year, if it hasn’t already started -- that will help Ireland,” Kristin Lindow, lead credit analyst on Ireland at the ratings company said in a July 15 phone interview from New York. “We’d certainly see the potential, if all else goes well, for that outlook to stabilize.”
Moody’s is the only large rating company that has Ireland on a non-investment rating, which prevents some funds from buying the nation’s debt. Standard & Poor’s raised its outlook on Ireland’s investment-grade sovereign rating on July 12, saying the government may exceed its targets for debt reduction as the economy heals.
“Moody’s stubbornness in holding on to its sub-investment grade rating remains an unhelpful overhang on the sovereign and the banks,” Philip O’Sullivan, an economist at Investec Plc in Dublin said after S&P’s outlook revision. “Investec continue to view a Moody’s upgrade as a matter of when, not if.”
Irish bonds returned 6.9 percent this year through July 15, according to Bloomberg World Bond Indexes. Spanish securities returned 5.5 percent and Italy’s gained 2.3 percent, while German bonds handed investors a loss of 0.9 percent, the indexes show. The yield on Irish five-year debt was at 2.93 percent yesterday, down from more than 17 percent in July 2011, when Moody’s cut the nation to non-investment grade.
Ireland’s economy is still growing and an improvement in domestic demand together with a potential pickup in the external environment may help it boost growth through to 2015, according to Lindow.
Lindow pointed to an expansion in the first quarter in gross national product, which excludes revenue from foreign-owned companies, to gauge performance. That measure more properly reflects activity and income that accrues to Irish residents, she said.
GNP expanded by 2.9 percent in the first quarter of the year from the previous three months. In terms of gross domestic product the economy slipped back into recession in the period.
“If the growth dynamic can be reinvigorated -- not necessarily to Celtic Tiger levels of growth but certainly faster growth than its Euro-zone partners -- then we would expect debt to be coming down at a steady pace,” Moody’s Lindow said.
Ireland has managed the euro-debt crisis better than some nations and “has been able to maintain this high institutional strength and that is a very important factor ultimately for its ability to regain an investment-grade rating,” she said.
Moody’s isn’t “‘counting’’ on Ireland getting a retroactive recap for its surviving banks from Europe’s rescue fund, the European Stability Mechanism, Lindow said.
‘‘There are some potential risks posed to any eventual recapitalization, with creditor nations appearing concerned that Irish bankers may have been too confident about being bailed out,’’ she said. ‘‘That hasn’t resonated well with the creditor nations.’’
Tapes of conversations between the executives of the failed Anglo Irish Bank Corp. indicated the bank sought to get the Irish central bank ‘‘to write a big check’’ to ‘‘pull them in’’ to support their money.
Bankers recorded on the tapes have denied that they tried to mislead the central bank, which is examining transcripts to see if any breaches of regulatory requirements occurred. Lindow didn’t specify Anglo Irish Bank and declined to elaborate.
Irish Finance Minister Michael Noonan wants the ESM to refund as much as 30 billion euros ($39 billion) the state spent saving surviving banks after the economy crashed in 2008. European leaders in June capped to 60 billion euros the funds available for direct bank aid from the 500 billion-euro fund.
Portugal’s political crisis, which saw the resignation of its finance minister this month and a surge in bond yields, hasn’t had a large impact on Ireland’s debt. The euro crisis’s ‘‘collective impact” on stressed economies is waning and “differentiation among credits is very important,” Lindow said.
“We are looking to see whether there really is a chance for Ireland to fully decouple from that crisis mode and move back to more normal circumstances,” she said. “There is no specific time frame so we are not waiting for the budget, we are not waiting for them the come out of the program. At this stage it has become a very subjective analysis about the potential impact of ongoing euro stress.”