Fitch upgrades Ireland's rating to A-

Monday 18 August 2014 08.42
Strong economic growth and the prospects of cost savings by paying back IMF loans early were behind the move
Strong economic growth and the prospects of cost savings by paying back IMF loans early were behind the move

The credit ratings agency Fitch has upgraded Ireland's sovereign debt rating to A- from BBB+.

Fitch said strong economic growth and the prospects of significant debt interest cost savings by paying back IMF loans early were behind the move, as was continued firm management of the State's finances.

Fitch is the second agency to move Ireland back to an A rating, following Standard & Poor's in June.

Moodys - the only agency to downgrade Irish bonds to "junk" status during the crisis - upgraded it to Baa1 (similar to BBB+ lower medium investment grade) earlier this year.

Yields on Irish Government bonds - an indicator of the cost of government borrowing - have been falling, in common with much of the euro zone, and dipped below 2% for the first time ever this morning, well before the news from Fitch.

Weak economic performance in the euro zone, which recorded no growth in the second quarter, growing expectations about a Quantitative Easing programme from the ECB and the deteriorating situation in Ukraine are all making euro zone sovereign debt more attractive to investors.  

Last month Fitch upgraded the viability ratings of Ireland's two main banks, Bank of Ireland and AIB, on the back of improved capital positions and a return to profitability.

It noted that non-performing loans peaked in 2013, albeit at a high level, and that house prices have started to rise, improving bank assets.

It assumed the main banks will not need further cash injections from the taxpayer.

"Fitch assumes that any additional sovereign support would be limited in size and required by smaller institutions only. Bank of Ireland would be able to tap equity markets if necessary to improve capital ratios and AIB would convert its perpetual preferential shares into equity."

It said Government debt sustainability has improved, and public finances remain on track to meet the terms of the EU Excessive Deficit Procedure (i.e a deficit below 3% of GDP next year), and that the Government continues to meet all international and domestic budget targets.

In its ratings report tonight, Fitch said the economic recovery in Ireland is gathering strength.

"The employment-led recovery of the Irish economy gained momentum in 1Q 2014 and Fitch forecasts GDP growth of 2.2% this year and 2% in 2015-16," it said.

"Unemployment continued to decline in H1 2014 and reached 11.5% in July 2014, in line with the 11.5% euro zone average, from a peak of 15% in early 2012.

"The improving labour market conditions have positive spill-over effects for heavily indebted households, the housing market and public finances. Ireland also benefits from the strengthening recovery of its major trading partners, especially the UK, reflected in exports growth accelerating to 7.4% in 1Q14," Fitch stated.

Responding to the upgrade, Finance Minister Michael Noonan said Fitch's upgrade and the rationale underpinning the decision reflects the significant  progress that has been made in growing the economy, creating jobs, repairing the banking sector and improving our public finances.

"Most importantly, Ireland's economic recovery is creating jobs and the benefits of the employment led recovery to individual households and the broader economy has been recognised by Fitch in their upgrade," Mr Noonan said. 

"Ireland is now rated at A grade by two of the three main rating agencies, our international reputation continues to improve and the NTMA continues to do an excellent job in securing stable and low cost funding for the State. This upgrade will further support their funding plans and will have positive impact across the economy," the Minister added.

The chief executive of the National Treasury Management Agency, John Corrigan, said that the upgrade underpins the already strong investor sentiment towards Ireland and will widen the potential investor base for Irish Government bonds.

"I am pleased to note Fitch's recognition of Ireland's favourable bond market access and the successful smoothing of the bond redemption profile," he added.

AGENCY                       RATING                     OUTLOOK

Fitch                               A-                             Stable

Standard & Poor's          A-                             Positive

Moody's                          Baa1                        Stable

Keywords: debt, economy