Ireland Regains Investment Grade Rating From Moody’sJoe Brennan and Donal Griffin
Ireland’s credit rating was restored to investment grade by Moody’s Investors Service after the country became the first to exit a euro-region bailout since the debt crisis erupted in 2009.
Moody’s raised the rating to Baa3 from Ba1 with a positive outlook, the ratings company said yesterday in a statement. Moody’s cut the nation’s ranking five times in two years before assigning junk status in July 2011. The increase means all three of the main credit rating companies now rank Ireland as investment grade.
To an extent, investors, who often ignore rating changes, already upgraded their view of Ireland. Last week, the country’s debt office sold new 10-year bonds through a group of banks at the lowest cost of borrowing for more than 13 years. Ireland left its bailout program in December.
“The upgrade really reflects both the growth potential of the Irish economy, which we think is going to help the fiscal consolidation going forward,” Kristin Lindow, a New York-based analyst for Moody’s, said in a phone interview. She also cited the government’s exit from its bailout program on schedule “and with improved solvency and certainly evidence of restored market access.” Moody’s also raised its rating on Ireland’s National Asset Management Agency to Baa3 from Ba1.
“Another positive surprise will keep the Irish bond rally on track,” Dermot O’Leary, chief economist at Goodbody Stockbrokers in Dublin, said in an e-mailed statement after the decision. “While it is a surprise given the recent downgrade of Irish banks, it is long overdue.”
Nine out of 10 analysts surveyed on Jan. 16 by Bloomberg News forecast the ratings company would leave Ireland’s credit ranking at junk for now.
Ireland’s 10-year bond yield was 3.44 percent yesterday, down from a euro-era peak of more than 14 percent in July 2011, as the government reined in its budget deficit and real-estate prices began to stabilize under the bailout program.
Bonds from the euro area’s most indebted countries extended this month’s rally as their economies recover from the region’s sovereign debt crisis. Portugal’s government bonds rose yesterday, with the yield on the notes due in February 2016 falling for a 12th day, as Standard & Poor’s said it no longer sees an imminent risk of a downgrade for the nation. Germany’s 10-year bund yield reached the lowest since Dec. 4.
In almost half the instances, yields on government bonds fall when a rating action by Moody’s and S&P suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.
For some money managers, though, investment criteria prevent buying low-rated securities. Moody’s cut Ireland from investment grade as the economy shrank about 10 percent as the biggest real-estate bubble in Western Europe burst.
“This is a positive result, albeit one that was very much overdue,” Philip O’Sullivan, chief economist at Investec Ireland, said in an e-mailed statement. “The Moody’s rating was clearly a barrier for some investors who would have been prepared to buy into the Irish recovery story but were unable to do so up to now because of it, so removing this should see our yields continue to tighten.”
Ireland’s debt has risen to about 123 percent of gross domestic product, almost five times its 2007 level. Much of the surge in debt came after the state had to pledge 64 billion euros ($87 billion) into the financial system.
With the economy turning, Prime Minister Enda Kenny’s government forecasts that the debt level will decline in 2014.
The Irish economy, too, is showing signs of life, expanding 1.5 percent in the third quarter, the fastest pace since 2011. Employment is rising, as companies from Google Inc. to Facebook Inc. expand their workforces in Ireland, and home prices rose for the first time in six years in 2013.
S&P 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.