The new Government received a boost last night as the last of three major credit rating agencies assigned an A-grade on Irish debt for the first time in five years.
One week after Taoiseach Enda Kenny returned to office, the move by Moody’s marks a public assertion of confidence in his minority administration and its broad economic plan.
Early on Saturday morning Moody’s upgraded Ireland’s long-term government to an A-grade rating , saying that the recent election of a Government gave confidence that the budget deficit would continue to fall. It also said that the outlook remained “positive”, indicating that further upgrades might be possible. It has upgraded Ireland’s rating to an A3 from a Baa1.
In a statement, the agency said that Ireland’s debt position continued to improve more rapidly than expected, with the debt ratio falling to 94 per cent of GDP by the end of last year. It said that the risk of a reversal of course on budget policy looked small, following the election of a Government led by Fine Gael, which had established a strong record of budget management in recent years.
In an upbeat assessment, Moody’s said Ireland was poised for further growth which would lead to continued improvements in its public finances.It pointed to the risk of a British exit from the EU but said that even if this happens the situaiton should be “manageable”for Ireland.
In its statement the agency said: “In Moody’s view, the risk of a reversal of the fiscal consolidation seen over the past several years is low. The recent political agreement between the two largest parties in parliament and the recent election of a minority goverment led by Fine Gael, which has established a strong track record of fiscal management over the past several years, give comfort that the budget deficit wil be reduced further in coming years.”
The Minister for Finance, Michael Noonan, said the move proved Ireland was progressing in the right direction. “That progression will carry on under the new Government. The decison shows that Moody’s are confident that the Programme for Government, published earlier this week, will reinforce that upward trend.”
The upgrade was also welcomed by the National Treasury Management Agency. Frank O’Connor, NTMA’s director of funding and debt management said: “Moody’s upgrade represents further affirmation of Ireland’s fiscal and economic recovery. While the rating is still two notches below Ireland’s highest rating it is encouraging that the “positive outlook was maintained, allowing potential for more upgrades.”
He said that while an eventual uplift to a A-grade had already been discounted by many investors, “the formal upgrade will assist our ongoing efforts to broaden the market for Irish sovereign debt, particularly to those who are obliged to use the lowest ratings across the major rating agencies.”
Last to upgrade
Moody’s had previously refused to follow rivals Standard & Poor’s and Fitch when they upgraded their assessments of Ireland’s debt to the A level in light of the advancing economic recovery.
Any A-grade on a sovereign bond increases its appeal to risk-averse investors, who accept lower interest payments in return for greater security.
Although the State has large post-crash debts, the fact that each of “big three” global rating agencies now have A-grades on Irish bonds will underpin investor confidence. This should help maintain lower borrowing costs, which is of benefit to the public finances.
The upgrade by Moody’s, the most conservative of the rating agencies, also expands the range of potential buyers of Irish bonds. Some low-risk investors insist on an A-grade from all three big agencies as the minimum requirement to take a position in any sovereign debt. Fiscal rules
The development comes despite uncertainty over the durability of the minority Government and its adoption of many uncosted promises in its political programme. But the Government also pledged to uphold stringent fiscal rules set out in domestic and EU law, a crucial declaration to financial markets of its intent to maintain spending discipline.
The Government has also pledged to take “all necessary action” to tackle high variable mortgage rates but earlier in the week Minister for Finance Michael Noonan insisted nothing would be done to undermine the banks.
Moody’s had been seen as an outlier by markets as Standard & Poor’s has an A+ rank on Ireland’s debt and Fitch has an A. As a result, some analysts have cast its anticipated action as a “catch-up” manoeuvre to put it on the same footing as its rivals.
Growing anticipation of an upgrade by Moody’s drove Irish 10-year borrowing costs down in Friday’s trading session.
The bonds changed hands at 0.8439 per cent as markets opened in the morning. By the close in Dublin the yield was at 0.8009 per cent, a mark of confidence in some quarters that an upgrade might be imminent.
Investors in Irish debt have been encouraged by swift economic growth and the restoration of order in the public finances. At the same time, intensive bond market interventions by the European Central Bank have also helped to cut the cost at which the State borrows.
Such trends are significant as Ireland’s large post-crash debt imposes very heavy costs on the public finances. The State spent €6.98 billion last year to service the debt.
With €22.93 billion in debt to mature in the next three years, maintaining investor confidence in the debt is a priority for the Government.
