Ireland’s ‘junk’ status criticised amid second bailout warning

Trading in Irish Government debt will be boosted when bond markets open this morning following comments by credit ratings agency Moody’s on Ireland’s fiscal progress and the State’s “diminished susceptibility” to being cut off from the financial markets.

However, the National Treasury Management Agency (NTMA) has criticised Moody's failure to lift Irish sovereign debt out of its "junk" status.

Moody's changed its outlook on its Ba1 rating of Irish Government bonds from negative to stable, but did not give Ireland a credit ratings upgrade, in its latest report on Ireland, issued late on Friday. This prompted the NTMA to say it was "disappointed" that Moody's "did not see fit" to take Irish sovereign debt out of junk or "sub-investment" status, where it has languished since July 2011.

Investment grade
"Market implied" ratings based on Ireland's bond market pricing, also published by Moody's, suggest Ireland's overall sovereign rating should be investment grade, the NTMA added in a statement.

The Ba1 grade, one step below investment grade, compares with BBB+ rankings by the two other big credit ratings agencies, Standard and Poor’s and Fitch.

However, certain classes of investors will only buy sovereign debt if it has been given an investment grade by all three agencies.

Kristin Lindow, a senior analyst at Moody’s in New York, told Bloomberg that its outlook report applied to a 12- to 18-month time horizon, but that Ireland’s credit position would be continually monitored. “We monitor ratings on an ongoing basis, so they’re not subject to a specific cycle,” she said.

Moody’s report, which followed a meeting of its ratings committee last Monday, was published one day after Ireland officially emerged from recession. In outlining the reasons for its stable outlook, the agency also said it expected that there would be a “resumption of growth among Ireland’s major trading partners, particularly the UK and the euro area, along with continued expansion of the US economy”.

The credit ratings agency said this would support Irish growth, “relative to its recent lacklustre performance”.

An update on the health of the European economy will be published today, when the September purchasing managers’ indexes for the manufacturing and services sectors are released by Markit.

The two gauges are expected to show an expansion in activity, according to a Bloomberg survey of analysts. However, Fine Gael parliamentary party members were warned last week that the State may need a second bailout if Ireland's major export markets suffer fresh economic slowdowns.

Public debt
Barclays Investment Bank chief economist Antonio Garcia Pascual told members at a private briefing that the sustainability of the State's public debt of 125 per cent of gross domestic product was at risk if the EU, Britain or the US has to deal with a significant slowdown over the next two years.

Moody’s has said it expects that general government debt will level off relative to GDP. But it also includes the possibility of contagion from economic stresses elsewhere in the euro zone as a reason why Ireland’s credit rating might falter.

Ireland must make a full and sustainable return to the money markets when it exits the troika programme, Minister for Finance Michael Noonan has reiterated. The Minister said Ireland cannot step out of a bailout and in again "like Lanigan's ball".

Meanwhile, former president of the European Central Bank Jean-Claude Trichet has pre-empted any potential request to attend the Government's banking inquiry. He told the Sunday Independent that the ECB made "collegial" decisions and it should be the current governor of the Irish Central Bank, Patrick Honohan, who attended, although Mr Honohan had not been in place during part of the crisis.

Mr Trichet said that “all our decisions being collegial, the president goes to the European parliament and the governors of Central Banks go to the national parliaments”. – (Additional reporting Bloomberg)