THE NATIONAL Treasury Management Agency (NTMA) reacted swiftly and negatively to Tuesday night’s debt downgrade from Standard & Poor’s (S&P), with its chief executive John Corrigan instantly dismissing the ratings agency’s analysis as “flawed”.
As with the S&P downgrade, the audience for the NTMA’s criticism was international, with perceptions of Irish fiscal stability on markets abroad key to the State’s success or failure in borrowing the funds it needs to remain afloat.
With the dust settling on the S&P move, we took the investment temperature within three of the markets where Irish bond investors would normally be found.
CITY OF LONDON
“Who would ever have thought that the market would start to compare Ireland with Iceland,” mused City veteran David Buik, of BGC Partners, as the London markets digested the S&P downgrade. But there was more sympathy than schadenfreude in London following Tuesday’s surprise overnight move by the ratings agency – after all, there’s little the City, or the coalition government, fears more at the moment than the loss of the UK’s prized Triple-A rating.
There was some admiration for the combative stance taken by NTMA’s John Corrigan, as he dared to disagree publicly with S&P: the ratings agencies have as few friends here as they do in Dublin and New York.
And many analysts queried S&P’s decision to apply no value to the property and land loans held by Nama, including its valuable London assets.
But, although the timing of the rating change may have been a surprise, the downgrade itself was not.
“Whilst the downgrade is negative we question how much of that is already priced in given the negative noises around Ireland’s banking sector over the last few weeks,” said Deutsche Bank strategist Jim Reid in London.
“The downside risk for the rating is a material deterioration of the banking sector and/or the economy from here,” he added.
Ireland’s descent “from paragon to pariah” had been a swift one, said Commerzbank’s Peter Dixon, especially as at the start of the year it had been regarded as one of the euro zone peripherals “most likely to get its house in order. While the situation was never as rosy as was painted, we suspect that the recent rating downgrade is in response to the worst possible case and not the most likely outcome”.
Assuming Ireland is still able to generate a primary budget surplus by 2013 and that the economy recovers, then the debt to GDP ratio can still be stabilised – “albeit above the 84 per cent level which the Government currently predicts,” Dixon said.
But, he added, “What the Government probably ought not to do is to push through additional fiscal retrenchment, and it may opt to follow the UK lead and exclude the effects of financial-sector transactions on the fiscal balances. It would make life much simpler.”
For Robert Crossley at Citibank, the next big test for Ireland will come in September. According to his estimates, €13 billion of Irish Government guaranteed bank debt expires next month – and over half of this on just two days, September 9th and 16th. Any difficulties the banks have in rolling over debt will add to the Government's woes and could further damage market sentiment. FIONA WALSH
NEW YORK
Greg Peters, global head of fixed income and economic research, Morgan Stanley, said the downgrade was “not a surprise by any stretch”.
“Ultimately, the focus in Ireland and across Europe is the impact upon the banks. The banks are still struggling on the heels of 2008 and this is an additional blow that has to be dealt with.”
Peters sees Greece as being “a very different case from that of Ireland because of the sharp increase in the Irish debt burden over a very short period”. He does not believe that the situation should stop investors taking an interest in Ireland, however.
“It is not an absolute by any stretch. But obviously any time the credit worthiness of the sovereign is questioned, it prompts investors to pause and reflect. At the same time . . . the market is very efficient. If there are opportunities, you will see capital follow.”
Sara Johnson, senior research director (global economics) at IHS Global Insight, was equally unsurprised by the S&P move, saying it simply brought the ratings agency’s analysis into line with her own.
“Many of the advantages that propelled Ireland’s growth have eroded. As well as the fiscal situation, it is less competitive than it once was. I believe there will not be solid growth for several years.”
She also highlighed Greece as carrying bigger problems.
“Greece is by far the most problematic [of the euro zone economies]. In Ireland, the situation is in some ways comparable, but at least the starting point for the debt levels is lower.”
Johnson believes the Government’s efforts to “get the books in order” will ultimately be successful.
Lee Markowitz, partner at Continental Capital Advisors, a global macro hedge fund in New York, is slightly more pessimistic, but not just for Ireland’s prospects.
“Our view is really that Europe, Japan and the US are all in the same boat – the debt levels are unsustainable,” he said.
"I don't see any light on the horizon. We have to get through this debt first, and really the only way is through default. Some countries will definitely default on their debt. I don't know whether Ireland will be among them – but defaults as a whole will rise." NIALL STANAGE
FRANKFURT
The Standard & Poor’s downgrade gave Ireland the wrong kind of attention in Germany yesterday with many news agencies reporting the decision as a “thumbs down for Ireland”.
The influential Handelsblattdaily headlined one of two reports on the downgrade: "Bank rescue brings Ireland to the financial brink."
The newspaper asked whether Ireland’s ability to raise money on capital markets might yet be at and end.
“After convincing the markets about the higher debt with its determined approach, the country is now shifting back into the centre of the European debt crisis,” wrote the newspaper, headlining another article, “Ireland has yet to make the turn for the better.”
In an editorial, it warned that Ireland’s exemplary handling of its debt crisis could be hampered by the never-ending story of the banks and bodes ill for other indebted EU countries.
The Financial Times Deutschlandsaid the "nervousness is back and Ireland is particularly in focus".
“After impressing investors initially with a tough austerity line,” wrote the newspaper, “now concerns are growing that restructuring the banks could burden state finances more heavily than expected.”
The conservative Frankfurter Allgemeinereported that the "debt crisis in Ireland is coming to a head".
Its readers learned that “because of its rapidly rising debt [Ireland] is one of the largest wobbly member states of European currency union”.
As with all other newspapers, the Frankfurter Allgemeinenoted the Government objections to the S&P ratings decision.
In an editorial headlined “Ireland’s Nightmare Bank”, the newspaper sees the news from Ireland as a stark warning that the European crisis, which started with Greece, is not over. It says Anglo Irish Bank may be too big to let fail, but might also be too large for the Irish State to rescue on its own. It calls it a nightmare bank, which has already swallowed capital equivalent to 15 per cent of the Irish domestic product – and no-one knows how much more it will need. It says Dublin is not yet Athens, but the Irish Government is losing room for manoeuvre and Ireland could become the next test for the euro.
Public broadcaster ARD described the decision as a “thumbs-down for Ireland” which had gone from “model pupil to problem child”.
Die Weltnewspaper suggested the "air is getting thin for Brian Cowen", but quoted analysts from Commerzbank who criticised the figures as "over the top".
"The latest rating downgrade is more a reaction to the worst case and not the most recent case," said analyst Peter Dixon. "Ireland is on the right track, the deficit will stabilise itself and can be stabilised by 2015." DEREK SCALLY
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