Ratings agency Fitch said today it doesn't currently expect its decision to place the Ireland's debt rating on a negative watch to affect the ratings of structured finance and covered bonds by Irish banks.
However, in a statement released this morning it said it expects the performance of Irish financial assets to deteriorate materially in the prevailing economic downturn.
Ireland's 'AAA' Long-term issuer default rating was placed on a negative watch earlier this month to reflect concerns about the recent evolution of the government's tax receipts and the present banking crisis. The placing indicates that the agency is considering downgrading Ireland’s rating.
Fitch estimates the real GDP of Ireland to have fallen by around 1.8 per cent in 2008; the agency is currently forecasting that GDP would contract 4 per cent this year, which could further undermine house prices.
The agency said that in spite of the current economic downturn, the performance of prime Irish transactions remains resilient: 90 days delinquencies are still averaging at around 1.4 per cent of current balance, and repossessions have been virtually non-existent to date.
However, it said it expects these figures to increase as performance could deteriorate rapidly and said it will monitor the transactions accordingly.
Fitch said it has recently initiated a review of its residential mortgage default probability and loss severity assumptions for Ireland. The agency said believes its current stress assumptions for residential mortgage frequency of foreclosure (WAFF) and loss severity (Wals) at the higher rating scenarios remain sufficiently remote as they reflect extreme deterioration in the Irish economy. However, it added that it expects to tighten the Wals assumptions at the lower rating categories to reflect its expectations of a 35 per cent peak-to-trough decline in house prices.
The agency said the ratings of Irish structured finance and covered bonds would see a more material impact if Ireland were to leave the Euro zone, as foreign currency risk would be introduced into transactions. However, despite the recent rejection of the Lisbon treaty and competitiveness issues raised by the strength of the euro, Fitch said it believes that secession from the single currency remains a remote possibility and does therefore not expect any downgrade in the country ceiling.