Cantillon: Fitch gives Ireland a vote of approval

The Coalition’s election narrative about the economy will have been helped by the unusual decision of ratings agency Fitch to upgrade Ireland’s debt rating during a general election campaign. Normally ratings agency would hold off and wait to see the election result on the logical basis that policy might change.

However, citing Ireland’s’s improved economic performance and strong gains in public finances, Fitch decided to move, upgrading the rating from A- to A, with a stable outlook, meaning no further change is anticipated.

The extent to which rating agency decisions affect market decisions is debatable. However, at a time when there were some small signs of caution in the market, the Fitch move will be welcome.

The gap between Irish bond yields and those of the countries we want to see ourselves ranked beside – France and Belgium – has widened a bit in the last week. This is not hugely significant– after all Irish 10-year yields are still a rock bottom 1 per cent and the market will remain supported by ECB buying. But it does show investors are watching Ireland.

Interesting, too, that the Fitch news broke at a time when US investor Michael Hasenstab told Reuters he had sold out his entire Irish bond holding, which had been in excess of €10 billion at one stage.

Hasenstab started buying in 2011, when bond yields were over 14 per cent, and has made a huge profit on Irish debt. However, his purchases were also vital in helping Ireland get back into the market by encouraging other investors to follow.

Hasenstab has sold out because his fund chases significant returns and, with Irish yields so low, there is not much significant future capital gain to be had. The US investor became such a force in the Irish market there was regular gossip when “Frankie” – as traders called his fund Franklin Templeton – was in buying.

Now Ireland is trying to attract longer-term investors seeking a stable return in today’s world of rock bottom interest rates. If the 10-year yield remains around 1 per cent for a while it will be a big boost for the incoming government, paying off in lowering the cost of raising new debt.