Moody's and Fitch Reiterate Negative Outlook on Ireland's Sovereign Debt

Includes: EIRL, IRL
by: Research Recap

Both Moody's and Fitch have reiterated a negative outlook on Ireland's sovereign debt, which is now rated one notch away from junk status.

Moody's today downgraded Ireland's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1. The outlook on the ratings remains negative. The key drivers for today's rating action are:

  1. 1. The expected decline in the Irish government's financial strength combined with the country's weaker economic growth prospects; and
  2. 2. The uncertainty created by the solvency test required by the European Stabilization Mechanism (ESM) for the provision of future liquidity support.

Moody's negative outlook on the ratings of the government of Ireland is based on its view that the Irish government's financial strength could decline further if economic growth were to be weaker than currently projected, or if fiscal adjustment were to fall short of the government's planned consolidation path.

Moody's has today also downgraded Ireland's short-term issuer rating by one notch to Prime-3 (commensurate with a Baa3 debt rating) from Prime-2. The country falls under the euro area's Aaa regional ceilings for bonds and bank deposits, which are unaffected by the Irish government's downgrade.

For details see "Moody's downgrades Ireland to Baa3 from Baa1; outlook remains negative" (complimentary for 7 days from publication).

Fitch Ratings Thursday affirmed Ireland's Long-term foreign and local-currency Issuer Default Ratings at "BBB+" and removed them from Rating Watch Negative (RWN). The outlook is negative. The agency has also affirmed the Short-term foreign currency IDR at "F2."

The resolution of the RWN and affirmation follows a review of the banking sector "stress test" results – the PCAR (Prudential Capital Adequacy Review) – and the Prudential Liquidity Assessment Review (PLAR) announced on 31 March and their implications for public finances and stabilisation of the Irish banking sector.

In Fitch's opinion, the PCAR offers a credible assessment of the additional capital that Irish banks will require to absorb potential further credit losses. However, it is too early to judge whether the additional capital injections will stabilise banks' funding positions, which remains an ongoing source of concern.

If deposits continue to decline and maturing medium and long-term debt is not refinanced, the capital and hence fiscal cost of meeting the deleveraging targets specified under the PLAR could be greater than currently assumed, although this risk is mitigated by the likelihood that the ECB would provide additional funding support if necessary.

The negative outlook primarily reflects concerns regarding the timing and pace of economic recovery, which is critical for stabilising public finances and debt over the medium term.

For details see "Fitch Affirms Ireland at 'BBB+', Outlook Negative" ($85.00).

Standard & Poor's on April 1 lowered Ireland's rating to "BBB+/A-2" with a stable outlook.

The outlook is now stable, reflecting our opinion that the assumptions underlying the stress test (The Financial Measures Programme, comprising Prudential Capital Assessment and Prudential Liquidity Assessment Reviews) … are robust and that the expected €18-€19 billion (11.5%-12.0% of GDP) net cost to the Irish state of additional recapitalization, plus the contingency buffer for the banking system, is within our range of expectations, albeit at the upper end. – Standard & Poor's credit analyst Frank Gill.

We are of the opinion that the sharp contraction in Ireland's nominal GDP and gross national product since 2008 has reached an end, and that the Irish
economy is now set to gradually recover.

For details see Research Update: Ireland's Ratings Lowered To 'BBB+/A-2' And Removed From CreditWatch; Stable Outlook Reflects Credibility Of Stress Test ($175.00)