Moody’s May Keep Irish at Junk as Bank Woes Trump Bailout ExitJoe Brennan
Ireland’s government may be left disappointed by Moody’s Investors Service, as analysts forecast the ratings company will leave the country’s credit ranking at junk for now.
Moody’s will raise its outlook on Ireland’s credit rating to positive from stable, when the ratings firm is scheduled to deliver its latest verdict on the country tomorrow, according to nine of 10 analysts and economists surveyed by Bloomberg News. They expect Moody’s to put an upgrade of Ireland’s investment ranking on hold until more details emerge about the health of the financial industry.
“The risk is that Moody’s decides to wait until May to go for a full upgrade, when the banks will have reported their annual results and disclosed the results of a central bank assessment of their balance sheets,” said Fiona Hayes, an analyst with Cantor Fitzgerald LP in Dublin.
Moody’s cut its rating on the nation to non-investment grade, or junk, in July 2011 after the collapse of the real estate market. Finance Minister Michael Noonan said last month he hoped the firm would raise the country from junk in early 2014 after exiting a three-year bailout program in December.
“I find it very unlikely that Moody’s would leave the rating and the outlook as they are,” said Christophe Pella, a global rates portfolio manager at Legal & General Group Plc in London, an owner of Irish debt. “Market access is a big consideration for them.”
Ireland’s National Treasury Management Agency sold 3.75 billion ($5.1 billion) of bonds last week at a yield of 3.543 percent, the lowest price since at least 2000, the year after Ireland adopted the euro, according to data compiled by Bloomberg. The yield on the security has since fallen to 3.49 percent as of 12:25 p.m. in Dublin.
Standard & Poor’s and Fitch Ratings didn’t reduce Ireland to junk during the debt crisis. They maintained Ireland at BBB+, the third-lowest investment grade, since April 2011 after successive cuts from AAA over the previous two years.
To an extent, investors have ignored Moody’s and other ratings agencies. In almost half the instances, yields on government bonds fall when a rating action by S&P and Moody’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
Investors who paid little heed to Moody’s call on Ireland have also been rewarded. Yields on Ireland’s October 2020 notes have fallen to 2.65 percent from more than 13 percent the day before Moody’s cut the nation’s debt to Ba1, one level below investment grade, on July 12, 2011.
The ratings agency took away Ireland’s investment grade after the state committed 64 billion euros to save its banks after the property bubble burst in 2008.
For Moody’s, concerns remain. The agency cut the rating of Ireland’s three biggest banks last month, citing “the continued rise and high level of non- performing loans” in the case of Bank of Ireland Plc, the biggest lender in the country.
Ireland’s banks face having to set aside additional provisions in their 2013 accounts to cover bad loan losses, following a central bank assessment. Still, Finance Minister Noonan reiterated to lawmakers in parliament in Dublin today that lenders won’t need additional capital as a result.
“Given their concern with the banks, it’s hard to see Moody’s suddenly upgrading the sovereign,” said Alan McQuaid, an economist at Merrion Capital in Dublin. “Still, I see them restoring Ireland to investment grade during 2014.”
Moody’s declined to comment on whether it will make a statement on Ireland tomorrow. While the ratings firm was scheduled to give an update on its view of fellow junk-rated nation Portugal on Jan. 10, it said nothing.
“Should Moody’s announce a rating action, we will do so in accordance with regulatory obligations,” it said in an e-mailed response to questions yesterday. “Note that Moody’s sovereign release calendar is indicative of dates for potential action only.”