Moody’s seen holding off Irish upgrade amid Brexit fears

Moody's, the credit ratings agency that downgraded Ireland to junk at the height of the financial crisis, is seen holding off returning the State to the A club on Friday as the threat of Brexit weighs.

Eight out of 11 economists and analysts polled by The Irish Times forecast that Moody's will keep Ireland at Baa1, seven levels below its top Aaa grade, in its next scheduled opportunity to review the rating, after markets close on Friday.

However, three of those surveyed see Moody’s, which has lagged the other two main ratings companies in upgrading the Republic’s creditworthiness following the crisis, finally returning Ireland to an A rating after the formation of a government last week.

"An Irish upgrade from Moody's to A level is way overdue, but we think they will wait until after the Brexit vote," said Anders Moller Lumholz, chief analyst with Danske Bank in Copenhagen, referring to the UK referendum next month on EU membership.

Moody’s awarded Ireland its top Aaa grade in 1998 at the outset of the euro era, but downgraded the State on a number of occasions during the financial crisis, hitting a low of junk in July 2011. While the firm upgraded Ireland twice in 2014 after the bailout programme ended and the economy started to expand at the fastest pace in the euro zone, it held off on an expected further upgrade last September, partly citing uncertainty ahead of the looming general election.

Standard & Poor’s

Standard & Poor's rates Ireland at A+, three levels higher than Moody's equivalent ratings system, while Fitch, the final of the three main ratings agencies, has the State at A.

“I don’t see any change in the rating just now, given that Moody’s said last September that it needs to see a rapid reduction in the public debt ratio,” said Ciaran O’Hagan, head of European rates strategy with Societe Generale in Paris. He also noted that the new Fine Gael-led minority government, formed last week, “has agreed more expansionary fiscal policies than foreseen in the budget for this year.”

The Department of Finance forecasts government debt will fall to 88 per cent of gross domestic product (GDP) by the end of this year from a peak of 123 per cent in 2013. However, Moody’s noted last September that it remains well above the median ratio of 40 per cent for A-rated governments.

While the National Treasury Management Agency, politicians and analysts have repeatedly criticised Moody's for being slower than rivals in upgrading Ireland, the broader market has long ignored the agency's view. The yield on the Republic's benchmark 10-year bonds, which peaked at over 14 per cent in the very month that Moody's reduced the nation to junk status, has since fallen to below 0.9 per cent - helped by European Central Bank policy.

Take the plunge

Still, some analysts think that Moody’s will take the plunge tomorrow.

“With the Celtic Tiger seemingly having refound its mojo - GDP is expected to have stayed above 5 per cent year-on-year in the first quarter - I guess the time is ripe,” said Martin van Vliet, a senior interest rate strategist with ING in Amsterdam, who sees an upgrade on Friday.

“The only risk is that they postpone until after the UK referendum on EU membership.”