Frankfurt am Main, April 15, 2011 -- Moody's Investors Service has 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. the expected decline in the Irish government's financial
strength combined with the country's weaker economic growth prospects;
and
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.
In related rating actions, Moody's has today also downgraded
by two notches to Baa3 from Baa1 the long term rating, and to Prime-3
from Prime-2 the short term rating, of Ireland's National
Asset Management Agency (NAMA), whose debt is fully and unconditionally
guaranteed by the government of Ireland. The outlook on NAMA's
rating remains negative, in line with the government bond ratings.
RATIONALE FOR DOWNGRADE
The first driver informing today's downgrade is the further weakening
of the Irish government's financial strength, given the subdued
economic activity and the crystallization of additional bank contingent
liabilities. From a sovereign perspective, the recent completion
of the Irish bank stress test (Prudential Capital Assessment Review or
PCAR) has led to further bank contingent liabilities weighing on the government's
balance sheet.
The country's weak economic growth prospects are driven by the fiscal
consolidation process, the ongoing contraction in private sector
credit, and a more adverse interest rate environment.
• The ongoing fiscal austerity programme is weakening domestic demand.
The announced EUR15 billion (9.6% of 2010 GDP) reduction
in net expenditure over the next five years, which is aimed at reducing
the general government budget deficit to 3% of GDP by 2015,
is likely to place considerable pressure on the country's recovery
prospects. Additional consolidation measures may be needed to enable
the country to meet fiscal targets.
• Furthermore, despite the consolidation of the Irish banking
system and the improved system-wide capital ratios, the availability
of private sector credit is likely to remain limited.
• Lastly, the Irish government's financial strength may
suffer as a result of what may be the first of a series of policy rate
increases by the European Central Bank (ECB) to slow the rise in euro
area inflation. Specifically, Ireland's finances may
be impacted by the resulting increase in its own funding costs,
as well as by the adverse impact of rising interest rates on Irish consumers,
given that more than 70% of Irish mortgages are variable-rate
mortgages. Moreover, a strengthening of the euro may negatively
affect exports.
The second driver is the uncertainty related to the ESM's solvency
test required for the provision of future liquidity support. Furthermore,
the recently announced Euro Plus Pact confirmed Moody's view that
the amended European institutional support framework will be limited to
liquidity support and that the EU will not provide fiscal transfers.
That said, Moody's acknowledges the ongoing commitment of
EU policymakers and the ECB to provide an effective liquidity backstop
for euro area countries that experience funding difficulties, a
commitment that supports those countries' government bond ratings.
Following today's downgrade, the rating on Ireland remains
in the investment-grade category, reflecting the Irish economy's
continued competitiveness and business-friendly tax environment.
The labour market's flexibility is reflected by the considerable
wage adjustment that occurred in the course of the crisis. Taking
Ireland's economic adjustment capacity into account, Moody's
expects that, after a period of prolonged retrenchment, Ireland's
long-term potential growth prospects remain higher than those of
many other advanced nations.
Moreover, in Moody's view, Ireland's commitment
to fiscal consolidation and structural reforms remains strong.
This commitment is reflected in the new government's adherence to
the fiscal adjustment as laid out in the conditionality of the EU/IMF
programme. Furthermore, with the PCAR, the Irish authorities
have applied a transparent approach to quantify the additional bank recapitalisation
needs, thereby, in turn, reducing the uncertainty that
relates to contingent liabilities. While the government's
debt-to-GDP burden is expected to be high by EU standards,
Ireland has managed high levels of indebtedness in the past, and
has shown political cohesion and commitment while enacting difficult fiscal
consolidation measures.
TRIGGERS FOR A POTENTIAL FURTHER RATING DOWNGRADE
Should the intended fiscal consolidation goals not be met, a further
rating downgrade would likely follow. Moreover, a further
deterioration in the country's economic outlook would also exert
downward pressure on the rating.
TRIGGERS FOR A POTENTIAL RATING UPGRADE
Moody's also notes that upward pressure on the rating could develop
if the country's fiscal consolidation efforts -- possibly supported
by a resumption of significant economic growth -- reverse the current
debt dynamics, thereby sustainably improving the Irish government's
financial strength.
PREVIOUS RATING ACTION AND METHODOLOGIES
Moody's last rating action affecting Ireland was on 17 December
2010, when the rating agency downgraded Ireland's government
bond ratings by five notches to Baa1 from Aa2, thereby concluding
the review for possible downgrade that it had initiated on 5 October 2010.
Prior to that, Moody's last rating action on Ireland was taken on
19 July 2010, when the rating agency downgraded Ireland's
government bond ratings by one notch to Aa2 from Aa1 and assigned a stable
outlook.
Moody's last rating action affecting NAMA was implemented on 17 December
2010, when the rating agency downgraded by five notches to Baa1
from Aa2 the rating of the senior unsecured debt issued by NAMA,
which is backed by a full guarantee from the Irish government, thereby
also concluding the review for possible downgrade that it had initiated
on 5 October 2010. Prior to that, Moody's last rating
action on NAMA was taken on 19 July 2010, when the rating agency
downgraded the government-backed debt to Aa2 from Aa1 and assigned
a stable outlook.
The principal Moody's rating methodology used in this rating was
"Sovereign Bond Ratings", published in September 2008.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Frankfurt am Main
Dietmar Hornung
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
New York
Bart Oosterveld
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
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SUBSCRIBERS: 212-553-1653
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
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Moody's downgrades Ireland to Baa3 from Baa1; outlook remains negative
