Moody's affirms Ireland's negative outlook

Ratings agency Moody’s has affirmed its negative outlook on Ireland’s sovereign rating, as the EU bailout of Cyprus and poor asset quality in the Irish banking system causes concern.

The agency also affirmed its Ba1 rating on Government bonds and the National Asset Management Agency.

The Ba1 rating is a speculative grade under Moody’s credit ratings system, frequently described in market commentary as “junk”.

The news will come as a blow to the Government which may have been hoping for some improvement in the outlook, following moves by rival agencies S&P and Fitch that saw Ireland return to a more stable footing.

In a note, Moody’s said the euro area’s continued vulnerability to shocks from the debt crisis was one of the principle factors behind maintaining the negative outlook for the economy, with particular concern caused by the EU agreement to impose a levy on bank deposits to raise some of the funds needed.

“The move has significantly heightened fears surrounding the safety of bank deposits in other European systems,” Moody’s said. “More generally, Moody’s believes that Ireland’s vulnerability to wider euro-area stresses has been reaffirmed by euro area policymakers’ handling of the Cyprus crisis, the increased risk tolerance apparent in their actions, and the uncertain risk assessment prompted by a more uncompromising and less predictable approach to crisis management.”

Poor asset quality in the Irish banking system is also playing a part, limiting the banks’ willingness to provide new credit.

“In addition, Moody’s notes that Irish banks have not yet begun implementing the Central Bank of Ireland’s new requirement to repossess homes when mortgages have been non-performing for a lengthy period, nor to adequately provision for their non-performing portfolios,” the agency said. “ Moody’s baseline case is that Irish banks’ large capital cushions should be able to accommodate this process without additional liabilities accruing to the government’s balance sheet.”

Although Ireland’s “junk” status remains , Moody’s cited the Government’s progress in implementing the austerity programme laid down by the EU, IMF and ECB troika , and highlighted the country’s progress in regaining market access.

The agency said it expects Ireland’s debt will peak at about 120 per cent of gross domestic product in 2013 and 2014, and begin to fall in 2015. Economic growth is expected to be positive in 2013, against a contracting euro zone economy.

However, any sizeable addition to the Government’s banking sector liabilities, or an increase in debt ratios could lead to a further downgrade.

“The rating agency would also view negatively any renewed increase in Ireland’s debt costs because of a loss of market confidence in the Irish recovery and/or in euro area policymakers’ ability to contain the euro area debt crisis,” Moody’s said.