Sovereign debt rating escapes S&P downgrade

THE STATE’S sovereign debt rating has escaped downgrade in the wake of the first loan transfers to the National Asset Management Agency (Nama), according to Standard & Poor’s.

The ratings agency confirms, however, that its outlook on the Republic remains negative in light of “upward pressures” on the Government’s debt burden.

The research came as Citigroup warned that Irish bonds inevitably face “some form of contagion” as uncertainty grows over Greece’s ability to meet its debt obligations.

In a note to investors, Citigroup interest-rate strategist Steven Mansell advised steering clear of Irish, Portuguese and Spanish bonds as the “Greek funding issue comes to a head”.

“We suggest maintaining underweight positions in all peripheral markets,” Mr Mansell wrote, noting that the relative stability seen in bond markets such as that of Ireland lately “looks unsustainable”. He also warned of increased pressure on Irish banks’ balance sheets.

In its research, Standard & Poor’s has maintained its view on both the Republic’s short- and long-term debt, assigning ratings of A-1+ and AA respectively.

“We affirmed the ratings because our estimate of the total cost to the Government of providing support to the financial sector is broadly unchanged following the announcement of details relating to the transfer of the first tranche of assets [to Nama],” the agency noted.

It went to highlight pressures on the State’s debt burden, which the agency believes stem from “continued fragility in the Irish banking sector and weak economic growth prospects”.

This poor economic outlook was, in turn, driven by factors such as households paying down debt rather than spending.

“Moreover, the deterioration in Ireland’s public finances has been substantial and, while the government continues to press ahead with its fiscal consolidation efforts, we believe there remain significant risks to the programme,” Standard & Poor’s said.

It warned that the ratings could be lowered again if the total cost of the bank bailout substantially exceeded estimates or if the State’s fiscal performance deteriorated.

It also noted that the ratings could stabilise if the banking sector recovered more quickly than anticipated and at a lower cost to the State than now seemed likely. A more robust exchequer, boosted by a stronger economy, would also lead to better ratings.

Considering the near term, Citigroup’s Mr Mansell believes Greece may have difficulty in raising the €11.6 billion it needs by the end of May without having recourse to the IMF and emergency lending from euro-zone states.

This raised the question of whether or not tensions would also rise in “other peripheral markets”.

“We think that some form of contagion is inevitable,” he said, noting that peripheral markets such as the Republic, Spain and Portugal shared severe structural imbalances that required tough action.

“We expect funding pressures to pick up in other peripheral markets over coming months,” Mr Mansell wrote, adding that Irish bank balance sheets would feel the strain as liquidity conditions tightened, in part because of the removal of the ECB’s first tender facility at the end of June.