Analysis: Ireland’s debt worries

Fitch Ratings today became the first agency to remove Ireland from its list of high-grade issuers rated AA- or above, while Moody’s has placed the country under review for a possible downgrade.

Multiple warnings from the world’s three most influential rating agencies suggest that there is still considerable uncertainty regarding the timing and strength of Ireland’s economic recovery. Ireland’s banking sector, which has required multiple bailouts, causes analysts particular concern.

The third big rating agency, Standard & Poor’s (S&P), had recently downgraded Ireland to AA-, its lowest S&P rating in 15 years.

Standard & Poor’s had recently downgraded Ireland to AA-, its lowest rating in 15 years

Today’s announcements from Fitch and Moody’s once again fuel worries over Ireland’s economic outlook and, ultimately, that of the entire eurozone. Just last week, the government bailed out Anglo-Irish Bank and agreed on more financial rescue packages.

Technically, Ireland’s long-term foreign and local currency issuer default rating by Fitch has been cut to A+ from AA-. Such issuer default ratings suggest a relative vulnerability on financial obligations covering bankruptcy, administrative receivership or similar concepts.

Fitch’s ratings range from AAA, which signifies the highest perceived credit quality, to D, which means that the issuer is already bankrupt. (article continues below)

Ireland’s rating update reflects Fitch’s expectations of low default risk, with the + indicating a relatively positive denotion. Its capacity for payment of financial commitments is considered as strong, although the country is vulnerable to adverse business or economic conditions.

Chris Pryce, a director in Fitch’s sovereign group, says the downgrade indicates the “exceptional and greater-than-expected fiscal cost” associated with the government’s recapitalisation of the Irish banks. The timing and strength of the Irish economic recovery also remains uncertain, Pryce says. The country posted negative growth in the second quarter of this year.

Ireland’s negative outlook implies a slightly greater than 50% probability of a further downgrade over the coming 12 to 24 months.

If Ireland’s rating is downgraded, it would go from Aa2 to Aa3

Pryce says although the rebalancing of the economy is underway and Ireland is beginning to regain its international competitiveness, the recovery is held back by various issues.

The ongoing distress in the housing and commercial real estate markets, household sector de-leveraging and the uncertainty over the global economic outlook are hampering the economic recovery.

Moody’s, meanwhile, has placed Ireland under review. If Ireland’s rating is downgraded, it would go from Aa2 to Aa3. Obligations rated Aa by Moody’s are judged to be of high quality and are subject to very low credit risk. However, the 3 indicates a ranking in the lower end of that generic rating category.

In August, S&P cut the rating one step from AA to AA-, its lowest since 1995. The rating agency cited the fact that costs continued to rise as the country looked to boost its troubled banking sector. An AA rating by S&P generally suggest that Ireland has a strong capacity to meet its financial commitments but, similar to that awarded by Moody’s, it is on the lower end of the generic rating category.

Jeremy Cook, the chief economist at World First, says the spectre of bailing out the engorged Irish banking sector is still haunting the country. Consumer confidence recently fell to a four-year low and a quick recovery is unlikely.

Following today’s announcement, Fitch have become the first to take Ireland out of a high-grade rating. Cook expects other ratings agencies to follow this announcement with their own comments.