S&P says deviation from €3.1bn target could damage fiscal deficit

Credit rating agency Standard and Poor's has intervened in the budget debate, saying any "significant departure" from the €3.1 billion in committed savings could lead to a wider deficit than it expects.

While declining to make policy recommendations, S&P said in response to questions from The Irish Times that fiscal discipline is important for the Government's credibility with private debt markets.

The agency's remarks come as the Labour wing of the Coalition resists pressure from the EU-International Monetary Fund troika to proceed with a €3.1 billion retrenchment on budget day.

Labour figures including Tánaiste Eamon Gilmore argue that a package of that scale is unnecessary as it would beat the troika's budget deficit targets by a wide margin.

However, the troika argues the safest option for the Government as it seeks to regain full access to private debt markets is to stick to the €3.1 billion for tax hikes and spending cutbacks.

Outlook shift
Asked if the time was right for Dublin to consider diluting the €3.1 billion, S&P cited its recent decision to change its outlook on Irish debt to "positive" from "stable". This reflects a gradual improvement in the standing of Irish debt in the eyes of S&P, whose assessment is a crucial barometer for investors in sovereign bonds.

“We have estimated the general government deficit in 2014 to be 4.5 per cent of GDP, down from 7.3 per cent in 2013, as our baseline scenario,” S&P said. “A significant departure from the €3.1 billion savings committed could result in a wider deficit and therefore a potentially slower debt reduction path, all else equal.”

S&P was also asked whether any dilution of the €3.1 billion would help or hinder the effort to return to private market financing at end of the bailout programme in mid-December.

“Ireland’s track record on achieving fiscal targets under the programme, in our view, is an important factor in building its credibility in the capital markets,” S&P said.

The same questions were sent to S&P's rivals Moody's and Fitch but neither replied.

S&P declined to provide an precise response when asked to specify the optimal reduction in the €3.1 billion if the Government decided to dilute it. Neither would it say how money not taken from the economy would be best deployed.

“We do not make policy recommendations, and will evaluate the impact of 2014 budget on economic growth, fiscal outcome and debt ratio after the budget is finalised,” S&P said.

The agency said fiscal outcome was “an important factor but not the only one” when asked whether any dilution of the €3.1 billion would help or hinder the prospects of an upgrade of S&P’s rating or outlook on Irish debt.

“We also evaluate factors such as the economic performance, banking sector asset quality, pace of state asset sales, and the implication on the trajectory of general government debt [S&P includes Nama bonds].”

Asked if it agreed with the claims by Government figures that Budget 2014 will be the final “harsh” budget, S&P said “active measures clearly are required” next year to reduce fiscal deficits.

Future scenario
"Going forward, the reduction in deficits are likely to be largely coming from existing measures and rise in revenues as the economy recovers more strongly as we assumed.

“We believe the key risk for the Irish economy in the near term to be uncertainties in external demand.”