Credit ratings agencies differ

By Eoin Fahy, Friday, 15th April 2011 | 0 comments

Two of the three main credit ratings agencies have updated their views of Ireland, and they have differed strongly in their outlook.  Moodys have downgraded Ireland by two notches, while Fitch has reaffirmed its (higher) rating and removed its warning of a possible downgrade.  The market impact has been limited.

Moodys:

The Moodys decision, announced this morning, was to downgrade Ireland by two notches to the equivalent of BBB-, which is the lowest possible rating which is still investment grade. 

The agency outlined several reasons for thedowngrade.

  • The ongoing fiscal austerity programme is weakening domestic demand.
  • Given the condition of the banks, the credit squeeze will continue.
  • The ECB's rate increase, and future rate increases, will raise Ireland's future borrowing costs and impact adversely on Irish consumers.
  • A strengthening euro may hurt exports.
  • The plan agreed at a recent EU summit to deal with future rescue deals, could raise the chances of Ireland being forced to restructure its debt post 2013.

However, the agency did reaffirm that Ireland's debt  remains investment-grade quality, pointing to continued competitiveness and business-friendly tax environment, labour market flexibility, and a higher potential growth rate in the long-term than other EU countries.  It also stated its view that Ireland's commitment to fiscal consolidation and structural reforms remains strong.

Finally, it stated that the rating could be upgraded if fiscal consolidation measures and possibly stronger growth turned around the public finances. On the other hand, a downgrade is possible if the fiscal consoldiation goals are not met, or if growth deteriorates further.

Fitch:

This agency, in contrast, did not downgrade Ireland, and indeed removed the credit downgrade alert that it had in place until yesterday.  Ireland's rating remains at BBB+, three notches above 'junk' status.

Fitch focussed mostly on the bank stress tests, and concluded that they are credible, although it is too early to judge whether the capital injections into the banks are large enough to stabilise their funding situation.  With regard to the economy, Fitch says that,

"The Irish economy appears to be nearing stabilisation and the latest efforts to resolve the banking crisis are credible"

The agency did cut its 2011 growth forecast to 0.5%, however, and remains concerned about the outlook for growth.

Like Moodys, it made positive comments about the policy stance here,

"Despite the traumatic economic and financial crisis ... Ireland's sovereign ratings remain supported by political and social stability, a strong political commitment to fiscal adjustment, a good modern debt servicing record, and the underlying strengths of its relatively high value-added and diversified economy, reflected in the ongoing recovery in exports and rising trade and current account surplus".

 

Comment:

In normal circumstances, credit ratings are very important to the ability of a government to issue bonds.  Many investors are not allowed to own bonds of below a certain quality threshold, and in particular are not allowed to own bonds that are rated below investment grade.  However, at the moment it is clearly impossible for the Irish government to issue any bonds at all, so credit ratings are not particularly relevant at the moment.  Nonetheless it is always interesting to see what "neutral" outside agencies think of the Irish situation. 

 

This time, however, the two agencies have obviously come to quite different views of the outlook, and this has muted the market impact.  Indeed, markets have been focussing much more on yesterday's comments from the German finance minister, which arguably implied that the German government expects Greece to have to restructure its debt sooner rather than later.

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