Frankfurt am Main, July 12, 2011 -- Moody's Investors Service has today downgraded Ireland's foreign-
and local-currency government bond ratings by one notch to Ba1
from Baa3. The outlook on the ratings remains negative.
The key driver for today's rating action is the growing possibility
that following the end of the current EU/IMF support programme at year-end
2013 Ireland is likely to need further rounds of official financing before
it can return to the private market, and the increasing possibility
that private sector creditor participation will be required as a precondition
for such additional support, in line with recent EU government proposals.
As stated in Moody's recent comment, entitled "Calls
for Banks to Share Greek Burden Are Credit Negative for Sovereigns Unable
to Access Market Funding" (published on 11 July as part of Moody's
Weekly Credit Outlook), the prospect of any form of private sector
participation in debt relief is negative for holders of distressed sovereign
debt. This is a key factor in Moody's ongoing assessment
of debt-burdened euro area sovereigns.
Although Moody's acknowledges that Ireland has shown a strong commitment
to fiscal consolidation and has, to date, delivered on its
programme objectives, the rating agency nevertheless notes that
implementation risks remain significant, particularly in light of
the continued weakness in the Irish economy.
The negative outlook on the ratings of the government of Ireland reflects
these significant implementation risks to the country's deficit
reduction plan as well as the shift in tone among EU governments towards
the conditions under which support to distressed euro area sovereigns
will be made available.
Despite the increased likelihood of private sector participation,
Moody's believes that the euro area will continue to utilise its
considerable economic and financial strength in its efforts to restore
financial stability and provide financial support to the Irish government.
The strength and financial capacity of the euro area is underpinned by
the Aaa strength of many of its members including France and Germany,
and indicated by Moody's Aaa credit ratings on the European Union,
the European Central Bank and the European Financial Stability Facility.
Moody's has today also downgraded Ireland's short-term
issuer rating by one notch to Non-Prime (commensurate with a Ba1
debt rating) from Prime-3.
In a related rating action, Moody's has today downgraded by
one notch to Ba1 from Baa3 the long-term rating and to Non-Prime
from Prime-3 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 that of the government's
bond ratings.
RATIONALE FOR DOWNGRADE
The main driver of today's downgrade is the growing likelihood that
participation of existing investors may be required as a pre-condition
for any future rounds of official financing, should Ireland be unable
to borrow at sustainable rates in the capital markets after the end of
the current EU/IMF support programme at year-end 2013. Private
sector creditor participation could be in the form of a debt re-profiling
-- i.e., the rolling-over or swapping
of a portion of debt for longer-maturity bonds with coupons below
current market rates -- in proportion to the size of the creditors'
holdings of debt that are coming due.
Moody's assumption surrounding increased private sector creditor
participation is driven by EU policymakers' increasingly clear preference
-- as expressed during the negotiations over the refinancing of Greek
debt -- for requiring some level of private sector participation
given that private investors continue to hold the majority of outstanding
debt. A call for private sector participation in the current round
of financing for Greece signals that such pressure is likely to be felt
during all future rounds of official financing for other distressed sovereigns,
including Ba2-rated Portugal (as Moody's recently stated)
as well as Ireland.
Although Ireland's Ba1 rating indicates a much lower risk of restructuring
than Greece's Caa1 rating, the increased possibility of private
sector participation has the effect of further discouraging future private
sector lending and increases the likelihood that Ireland will be unable
to regain market access on sustainable terms in the near future.
This in turn implies that some Irish government bond investors would need
to absorb losses. The increased risk of a disorderly and outright
payment default or of a disorderly debt restructuring by Greece also increases
the risk that Ireland will be unable to regain access to private sector
credit.
The downward pressure that this creates is mitigated in Ireland's
case by the strong commitment of the Irish government to fiscal consolidation
and structural reforms, and by its success, so far,
in achieving the fiscal adjustment required by the EU/IMF programme.
To date, Ireland has met all of its objectives under that programme.
In the first half of 2011, the primary balance target was exceeded,
with tax revenues on track and lower-than-anticipated government
expenditures. However, Moody's cautions that implementation
risks related to the overall deficit reduction aims of the three-year
programme are still significant, particularly in light of the continuing
weakness of domestic demand.
Apart from Ireland's adherence to fiscal consolidation, Moody's
also acknowledges the Irish economy's continued competitiveness
and business-friendly tax environment. The considerable
wage adjustment that occurred in the course of the crisis reflects the
Irish labour market's flexibility. 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. While the government's debt-to-GDP
burden is expected to be high compared to similarly rated sovereign credits,
Ireland has managed elevated levels of indebtedness in the past,
and has shown political cohesion while enacting difficult structural adjustments.
WHAT COULD CHANGE THE RATING UP/DOWN
Moody's would consider a further rating downgrade if the Irish government
is unable to meet the targeted fiscal consolidation goals. A further
deterioration in the country's economic outlook would also exert
downward pressure on the rating, as would further market disruption
resulting from a disorderly Greek default.
Moody's also notes that upward pressure on the rating could develop
if the government's continued success in achieving its fiscal consolidation
targets, supported by a resumption of sustained economic growth,
is able to 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 implemented on
15 April 2011, when the rating agency downgraded Ireland's
government bond ratings by two notches to Baa3 from Baa1, and maintained
the negative outlook.
Moody's last rating action affecting NAMA was implemented on 15
April 2011, when the rating agency downgraded by two notches to
Baa3 from Baa1 the senior unsecured debt issued by NAMA, which is
backed by a full guarantee from the Irish government. The negative
outlook was maintained.
The principal Moody's rating methodology used in this rating was
"Sovereign Bond Ratings" published in September 2008.
Please refer to the Credit Policy page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
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 considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a 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.
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 on our website www.moodys.com for
further information.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Frankfurt am Main
Dietmar Hornung
VP - Senior Credit Officer
Financial Institutions Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
New York
Bart Oosterveld
MD - Sovereign Risk
Financial Institutions Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Ireland to Ba1; outlook remains negative
