Moody’s Mellows on Irish Debt – Will the Emerald Isle Stay on Track?

Last week, ratings agency Moody’s finally did the right thing and upgraded Ireland’s sovereign debt rating from Baa3 to Ba1; that’s back up to investment grade and in line with the ratings from Fitch and S&P. Moody’s had been the only rating agency to originally decide that Ireland was junk status – Ireland’s strong economic outlook and hard work on fiscal reforms had convinced Fitch and S&P to ignore that it had lost market access and those ratings agencies have continued to deem it a decent investment prospect through the last few difficult years.

Moody’s action comes on the back of Ireland’s recent exit from the EU/IMF programme and its convincing return to the market. On January 7, Ireland enjoyed bumper demand for their first debt sale since exiting its EU/IMF bailout, suggesting strong market confidence in Ireland’s recovering economy.  Indeed, Moody’s cited the growth potential of the Irish economy and its ongoing fiscal consolidation as reasons for the upgrade, both things that the other rating agencies already knew. Moody’s is still more negative than both S&P and Fitch (which both assign a BBB+ rating), but Moody’s holds out the prospect for a further upgrade. Moody’s did note that if Ireland’s government continues to meet its fiscal consolidation targets, or if their economy grows rapidly and the improvement of the banking sector is maintained, then the rating could move up again.

Even in the last week, Ireland has already benefited greatly from Moody’s decision. Irish sovereign bond yields tumbled following the announcement, with Irish sovereign five-year yields now lower than those of the UK (rated in the AA category by all three major rating agencies).  You might wonder if such positive market sentiment can continue. And you’d be justified; Ireland isn’t completely out of danger. With its debt-to-GDP ratio still over 100% and the highest in the European Union, there is still significant fiscal tightening to come – and austerity fatigue could soon set in given the tremendous fiscal cuts that have already taken place. At the same time, the banking sector continues to pose a risk – with a severe impact on the government’s balance sheet if further losses materialise. And of course, the risk of a renewed deterioration in the Eurozone or a new crisis in another peripheral country with the associated contagion cannot be ignored. This is Europe after all.

 

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