Fitch Downgrades Ireland to 'BBB+; Outlook Stable
09 Dec 2010 6:11 AM (EST)
Fitch Ratings-London-09 December 2010: Fitch Ratings has downgraded the Republic of Ireland's (Ireland) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB+' from 'A+', respectively. The Outlooks on the Long-term IDRs are Stable. Fitch has simultaneously downgraded Ireland's Short-term foreign currency IDR to 'F2' from 'F1'.
The Euro Area Country Ceiling of 'AAA' remains unchanged. The notes issued by the National Asset Management Agency (NAMA) have also been downgraded to 'BBB+' from 'A+' and to 'F2' from 'F1', in line with the sovereign ratings.
The downgrade reflects the additional fiscal costs of restructuring and supporting the banking system, reflecting ongoing contingent liabilities arising from the guarantee of Irish bank debt and deposits (equivalent to 93.5% of GDP at end-Q310); weaker prospects and greater uncertainty regarding the economic outlook as a result of the recent intensification of the financial crisis; and the associated loss of access to market funding at an affordable cost, resulting in reduced fiscal financing flexibility.
The scale and pace of the deterioration of public finances, continuing contingent fiscal and macro-financial risks emanating from the banking sector, combined with the highly uncertain economic outlook and loss of market access, means that Ireland's sovereign credit profile is no longer consistent with a high investment grade rating. Ireland's continued investment grade status is underpinned by the EU-IMF external support, as well as the Irish government's demonstrated commitment to fiscal consolidation and still strong underlying economic fundamentals.
The structural budget deficit, which is estimated by the IMF to be equivalent to 8.6% of GDP in 2010, is the largest in the Euro Area and of any Fitch-rated sovereign in the single 'A' and 'BBB' rating categories. Similarly, the gap between the 2010 primary (non-interest) budget balance and that required to stabilise the government debt-to-GDP ratio is also the widest. Even assuming there are no additional fiscal costs associated with the restructuring of the banking sector and excluding the government-guaranteed debt issued by NAMA to fund the transfer of distressed assets from bank balance sheets (around 40% of GDP by end-Q111), gross government debt to GDP and revenue is projected to peak in 2013 at approximately 103% and 288% respectively, compared with the 'A' medians of 44% and 144%, respectively. General government interest payments/revenue are projected to rise to 15% by 2014 on official projections, substantially above the 10-year 'A' median of 5%.
Much of the Irish State's EUR17.5bn contribution to the EUR85bn EU-IMF programme, which includes EUR10bn from the National Pension Reserve Fund (NPRF), will be used to fund further capital injections into the banks and support asset disposals and 'deleveraging'. Liquid high-quality assets held in the NPRF and the Treasury cash reserve will therefore shrink under the programme. Combined with the loss of market access, which is likely to be prolonged, the Irish government's financing flexibility is significantly diminished, despite access to EUR67.5bn of external policy-conditional debt financing from the EU and IMF.
The outlook for the Irish economy, critical for stabilising public finances and debt over the medium term as well as for bank asset quality, is highly uncertain. However, the Stable Outlook reflects Fitch's current judgement that the risks around the economic outlook and hence Ireland's credit profile and ratings are broadly balanced. The rebalancing of the Irish economy is well underway, demonstrated by the forecast shift of the current account into surplus next year and recent strong performance of manufacturing and exports. However, the intensification of the financial crisis, combined with the headwinds from fiscal austerity and accelerated bank 'deleveraging', could stall the incipient recovery.
Ireland's 'BBB+' sovereign rating reflects still strong underlying fundamentals, including a high-value added, diversified and 'investment-friendly' economy as well as its modern history of debt service and social stability, and the relative security of fiscal funding from the EU-IMF. This is balanced against the severity of the banking crisis, fiscal challenge and a public debt burden that will reach levels that are substantially higher than is typical for similarly-rated sovereigns.
The downgrade of Ireland's sovereign ratings follows the conclusion of the review announced on 18 November and follows Fitch's previous downgrade of Ireland to 'A+' with a Negative Outlook on 6 October.
As I've said, it makes zero sense to continue living in Ireland unless you, alone with a very large group of your fellow residents, lend to the state at a rate significantly lower than.5.83% is a killer
Ratings agency Fitch has downgraded our rating to BBB+ partly based on the budget idiocy of slashing 6Bn out of the economy. A spokesman for the agency said on RTE News at One now that the increase from 3Bn to 6Bn and the promise of more to come was a factor in their decision.
Fail again for Lenihan.