Frankfurt am Main, December 17, 2010 -- Moody's Investors Service has today downgraded Ireland's foreign-
and local-currency government bond ratings by five notches to Baa1
from Aa2. The outlook on the Baa1 rating is negative. Today's
rating action concludes the review for possible downgrade that Moody's
had initiated on 5 October 2010.
Today's rating action is in line with the guidance that Moody's
gave in a comment published on 22 November 2010, in which the rating
agency indicated that the most likely outcome of the rating review would
be a multi-notch downgrade that would leave Ireland's rating
within the investment-grade category.
The key drivers for today's rating action are:
1. the crystallization of bank related contingent liabilities;
2. the increased uncertainty regarding the country's economic
outlook; and
3. the decline in the Irish government's financial strength.
Moody's negative outlook on the ratings of the government of Ireland
is based on our forward looking view on the risk that the Irish government's
financial strength could decline further if economic growth were to be
weaker than currently projected or the costs of stabilizing the banking
system turn out to be higher than currently forecast.
Moody's has today also downgraded Ireland's short-term issuer
rating to Prime-2 (commensurate with a Baa1 debt rating) from Prime-1.
Ireland falls under the Eurozone's Aaa regional ceilings for bonds
and bank deposits, which are unaffected by the Irish government's
downgrade.
In reaching this decision Moody's notes that the economy's
competitiveness and its business-friendly tax environment are credit-positive.
The labour market's flexibility is reflected by the considerable
wage adjustment that occurred in the course of the crisis. Moreover,
recent economic information, in particular healthy export data are
factored in to our conclusion.
In a related rating action, Moody's has also downgraded by
five notches to Baa1 from Aa2 the rating of Ireland's National Asset
Management Agency (NAMA), whose debt is fully and unconditionally
guaranteed by the government of Ireland. The rating was also placed
on review for possible downgrade on 5 October 2010. The outlook
on the NAMA rating is negative, in line with the government bond
ratings.
For a more detailed analysis of today's rating action on Ireland,
please refer to Moody's Special Comment entitled "Key Drivers of Moody's
Decision to Downgrade Ireland to Baa1 from Aa2," which is available
on www.moodys.com.
RATIONALE FOR DOWNGRADE
"Firstly, Ireland's sovereign creditworthiness has suffered
from the repeated crystallization of bank related contingent liabilities
on the government's balance sheet", says Dietmar Hornung,
Vice President -- Senior Credit Officer at Moody's Investors
Service and lead analyst for Ireland. Further to recent announcements,
the Irish government has now committed to injecting around EUR50 billion
of capital into its banking sector -- an amount that represents approximately
32% of GDP. Moody's observes that, in the weeks
prior to the announcement of the EUR85 billion EU/IMF support package,
the problems in the Irish banking sector once again became acute as confidence
in and funding of Irish banks evaporated in conjunction with the expiry
of the original government guarantee.
"Secondly, the increased uncertainty regarding the outlook
for the Irish economy -- an additional determinant of today's
rating action -- is the result of the continued severe downturn in
the financial services and real estate sectors as well as the ongoing
contraction in private sector credit," explains Mr.
Hornung. The uncertain economic prospects are amplified by the
required fiscal austerity programme, which is likely to weigh on
domestic demand. Moreover, the announced EUR15 billion (approximately
9.5% of GDP) reduction in net expenditure over the next
four years to reduce the general government budget deficit to 3%
of GDP represents a further considerable drag on the country's recovery
prospects. Indeed, the EU has acknowledged Ireland's
uncertain economic outlook by extending by one year to 2015 the timeframe
within which the country has to achieve the 3% general government
budget deficit target.
Thirdly, against the backdrop of the crystallization of bank contingent
liabilities and the uncertain economic outlook, Ireland's
government financial strength has deteriorated significantly. "Taking
account of Ireland's subdued growth in the coming years, compliance
with the budget targets embedded in the country's five-year
fiscal plan and plausible additional bank recapitalization needs,
Moody's now expects Ireland's debt ratio to increase to 120%
in 2013 from 66% in 2009 before levelling off," says
Mr. Hornung. When including the government-guaranteed
NAMA debt, Moody's expects the ratio to peak at 140%.
"However, there are a number of reasons why Ireland's
rating remains within the investment-grade category,"
explains Mr. Hornung. Ireland's commitment to fiscal
consolidation and structural reforms is impressive, as represented
by the four-year fiscal plan and the budget 2011. Ireland
also benefits from significant economic and financial integration with
Europe, supporting two-way trade and attracting foreign direct
investment (FDI) both from EU countries as well as from non-EU
corporations that seek access to the EU market by investing in locally
based facilities. Moreover, as an EMU member, Ireland
can rely on the availability of substantial external support -- as
illustrated by the EU/IMF package -- a feature that supports the
credit.
Taken Ireland's economic adjustment capacity into account,
Moody's believes 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 by EU standards,
Ireland has managed high levels of indebtedness in the past, and
has shown political cohesion and commitment to enacting difficult fiscal
consolidation measures. Furthermore, the government is making
considerable investments in its banking system that might ultimately generate
income than can be used to help service its debt.
TRIGGERS FOR A POTENTIAL FURTHER RATING DOWNGRADE
Should Ireland's adjustment capacity prove to be insufficient to
stabilize debt metrics in the foreseeable future, a further rating
downgrade would follow. Moody's will closely monitor the specific
measures taken by the government as part of the fiscal consolidation plan.
Moreover, a severe deterioration in the country's debt metrics
in the event of ongoing support needs for the banking system would exert
further downward pressure on the rating. Finally, Moody's
will also be monitoring the evolution of plans for the long-term
support mechanism under discussion within the EU to determine whether
there are any developments that might undermine its external support assumptions.
TRIGGERS FOR A POTENTIAL RATING UPGRADE
Although a positive development is unlikely in the near future,
Moody's notes that the outlook on the government's Baa1 bond ratings
could stabilize if the country embarks on a sustained consolidation path
-- possibly supported by a resumption of economic growth --
that would stabilize government financial strength on a lasting basis.
PREVIOUS RATING ACTION AND METHODOLOGIES
Moody's last rating action affecting Ireland was implemented on
5 October 2010, when the rating agency placed Ireland's government
bond ratings on review for possible downgrade. 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
to Aa2 and assigned a stable outlook.
Moody's last rating action affecting NAMA was implemented on 5 October
2010, when the ratings agency placed the senior unsecured debt issued
by NAMA, which is backed by a full guarantee from the Irish government
on review for possible downgrade. Prior to that, Moody's
last rating action on Ireland was taken on 19 July 2010, when the
rating agency downgraded the government-backed debt to Aa2 and
assigned a stable outlook.
The principal Moody's rating methodology used in this rating was
"Sovereign Bond Ratings", published in September 2008
and available on www.moodys.com.
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
Daniel McGovern
MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
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 Baa1 from Aa2; outlook negative
