Via Moody’s
Moody’s Investors Service has today
downgraded Ireland’s foreign- and local-currency government bond ratings
by one notch to Ba1 from Baa3. The outlook on the ratings remains
negative.
The key driver for today’s rating action is the growing possibility that
following the end of the current EU/IMF support programme at year-end
2013 Ireland is likely to need further rounds of official financing
before it can return to the private market, and the increasing
possibility that private sector creditor participation will be required
as a precondition for such additional support, in line with recent EU
government proposals.
As stated in Moody’s recent comment, entitled “Calls for Banks to Share
Greek Burden Are Credit Negative for Sovereigns Unable to Access Market
Funding” (published on 11 July as part of Moody’s Weekly Credit Outlook),
the prospect of any form of private sector participation in debt relief
is negative for holders of distressed sovereign debt. This is a key
factor in Moody’s ongoing assessment of debt-burdened euro area
sovereigns.
Although Moody’s acknowledges that Ireland has shown a strong commitment
to fiscal consolidation and has, to date, delivered on its programme
objectives, the rating agency nevertheless notes that implementation
risks remain significant, particularly in light of the continued weakness
in the Irish economy.
The negative outlook on the ratings of the government of Ireland reflects
these significant implementation risks to the country’s deficit
reduction plan as well as the shift in tone among EU governments towards
the conditions under which support to distressed euro area sovereigns
will be made available.
Despite the increased likelihood of private sector participation, Moody’s
believes that the euro area will continue to utilise its considerable
economic and financial strength in its efforts to restore financial
stability and provide financial support to the Irish government. The
strength and financial capacity of the euro area is underpinned by the
Aaa strength of many of its members including France and Germany, and
indicated by Moody’s Aaa credit ratings on the European Union, the
European Central Bank and the European Financial Stability Facility.
Moody’s has today also downgraded Ireland’s short-term issuer rating by
one notch to Non-Prime (commensurate with a Ba1 debt rating) from Prime-3.
In a related rating action, Moody’s has today downgraded by one notch to
Ba1 from Baa3 the long-term rating and to Non-Prime from Prime-3 the
short-term rating of Ireland’s National Asset Management Agency (NAMA),
whose debt is fully and unconditionally guaranteed by the government of
Ireland. The outlook on NAMA’s rating remains negative, in line with that
of the government’s bond ratings.
RATIONALE FOR DOWNGRADE
The main driver of today’s downgrade is the growing likelihood that
participation of existing investors may be required as a pre-condition
for any future rounds of official financing, should Ireland be unable to
borrow at sustainable rates in the capital markets after the end of the
current EU/IMF support programme at year-end 2013. Private sector
creditor participation could be in the form of a debt re-profiling —
i.e., the rolling-over or swapping of a portion of debt for
longer-maturity bonds with coupons below current market rates — in
proportion to the size of the creditors’ holdings of debt that are coming
due.
Moody’s assumption surrounding increased private sector creditor
participation is driven by EU policymakers’ increasingly clear preference
— as expressed during the negotiations over the refinancing of Greek
debt — for requiring some level of private sector participation given
that private investors continue to hold the majority of outstanding debt.
A call for private sector participation in the current round of financing
for Greece signals that such pressure is likely to be felt during all
future rounds of official financing for other distressed sovereigns,
including Ba2-rated Portugal (as Moody’s recently stated) as well as
Ireland.
Although Ireland’s Ba1 rating indicates a much lower risk of restructuring
than Greece’s Caa1 rating, the increased possibility of private sector
participation has the effect of further discouraging future private
sector lending and increases the likelihood that Ireland will be unable
to regain market access on sustainable terms in the near future. This in
turn implies that some Irish government bond investors would need to
absorb losses. The increased risk of a disorderly and outright payment
default or of a disorderly debt restructuring by Greece also increases
the risk that Ireland will be unable to regain access to private sector
credit.
The downward pressure that this creates is mitigated in Ireland’s case by
the strong commitment of the Irish government to fiscal consolidation and
structural reforms, and by its success, so far, in achieving the fiscal
adjustment required by the EU/IMF programme. To date, Ireland has met all
of its objectives under that programme. In the first half of 2011, the
primary balance target was exceeded, with tax revenues on track and
lower-than-anticipated government expenditures. However, Moody’s cautions
that implementation risks related to the overall deficit reduction aims
of the three-year programme are still significant, particularly in light
of the continuing weakness of domestic demand.
Apart from Ireland’s adherence to fiscal consolidation, Moody’s also
acknowledges the Irish economy’s continued competitiveness and
business-friendly tax environment. The considerable wage adjustment that
occurred in the course of the crisis reflects the Irish labour market’s
flexibility. Taking Ireland’s economic adjustment capacity into account,
Moody’s expects that, after a period of prolonged retrenchment, Ireland’s
long-term potential growth prospects remain higher than those of many
other advanced nations. While the government’s debt-to-GDP burden is
expected to be high compared to similarly rated sovereign credits,
Ireland has managed elevated levels of indebtedness in the past, and has
shown political cohesion while enacting difficult structural adjustments.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody’s would consider a further rating downgrade if the Irish government
is unable to meet the targeted fiscal consolidation goals. A further
deterioration in the country’s economic outlook would also exert
downward pressure on the rating, as would further market disruption
resulting from a disorderly Greek default.
Moody’s also notes that upward pressure on the rating could develop if
the government’s continued success in achieving its fiscal consolidation
targets, supported by a resumption of sustained economic growth, is able
to reverse the current debt dynamics, thereby sustainably improving the
Irish government’s financial strength.
PREVIOUS RATING ACTION AND METHODOLOGIES
Moody’s last rating action affecting Ireland was implemented on 15 April
2011, when the rating agency downgraded Ireland’s government bond ratings
by two notches to Baa3 from Baa1, and maintained the negative outlook.
Moody’s last rating action affecting NAMA was implemented on 15 April
2011, when the rating agency downgraded by two notches to Baa3 from Baa1
the senior unsecured debt issued by NAMA, which is backed by a full
guarantee from the Irish government. The negative outlook was maintained.
The principal Moody’s rating methodology used in this rating was
“Sovereign Bond Ratings” published in September 2008. Please refer to
the Credit Policy page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this
announcement provides relevant regulatory disclosures in relation to each
rating of a subsequently issued bond or note of the same series or
category/class of debt or pursuant to a program for which the ratings are
derived exclusively from existing ratings in accordance with Moody’s
rating practices. For ratings issued on a support provider, this
announcement provides relevant regulatory disclosures in relation to the
rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider’s credit rating. For provisional ratings, this
announcement provides relevant regulatory disclosures in relation to the
provisional rating assigned, and in relation to a definitive rating that
may be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior to
the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings tab
on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings and
public information.
Moody’s considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing a
rating.
Moody’s adopts all necessary measures so that the information it uses
in assigning a rating is of sufficient quality and from sources Moody’s
considers to be reliable including, when appropriate, independent
third-party sources. However, Moody’s is not an auditor
and cannot in every instance independently verify or validate information
received in the rating process.
Moody’s Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the credit rating action. Please see the
ratings disclosure page on our website www.moodys.com for
further information.
Please see Moody’s Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody’s ratings were fully digitized and accurate data may not
be available. Consequently, Moody’s provides a date that
it believes is the most reliable and accurate based on the information
that is available to it. Please see the ratings disclosure page
on our website www.moodys.com for further information.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody’s legal entity that has issued
the rating.
Moody’s Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
