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Fitch: Irish deal good but no upgrade

Friday, February 08 16:32:36

Ireland's agreement to replace the promissory notes provided to Irish Bank Resolution Corporation (IBRC) is positive for the sovereign but not good enough for a ratings upgrade, according to Fitch Ratings.

It reduces refinancing needs, eases medium-term fiscal pressure and makes Ireland's public finances more transparent, the global ratings agency said today.

However, it has limited impact on Ireland's debt stock, it said

"The agreement significantly cuts the Irish sovereign's funding requirement. The government estimates it will have to borrow less than E1bn a year to service the interest on the new government bonds, compared with payments of over E3bn annually on the promissory notes. It also simplifies the complex and opaque arrangements including ELA loans parallel with the promissory notes that have been in place since the financial crisis."

The Irish government estimates the interest saved on the new government bonds compared with the promissory notes to be worth about E1.1bn in 2013, E0.9bn in 2014, and E0.7bn in 2015.

Fitch noted that, this year, the savings are cancelled out by the estimated costs of liquidating IBRC, but in both 2014 and 2015, the result should be to lower the government's budget deficit by 0.6pc of GDP.

"Lower cash flow financing needs and greater transparency can add to the positive momentum behind Ireland's push to regain full bond market access (our base case already assumes this will happen by the end of 2013)," it said.

But it added that, nevertheless, the deal has limited immediate impact on the sovereign's overall debt level.

Fitch maintains its view that debt to GDP will peak in 2013-2014 at about 120pc of GDP and then fall gradually. So although a deal was not factored into our baseline projection and is a positive surprise, it does not affect Ireland's public debt dynamics sufficiently to change our ratings assessment in the short run."

"However, by extending the average duration of the sovereign's total debt stock (by approximately three years, to above 10 years), Ireland will have one of the highest average maturity profiles among Fitch-rated sovereigns. The Irish authorities said on Thursday that the Irish Government and the European Central Bank had agreed to replace the promissory notes with long-term government bonds, with maturities ranging from 25 to 40 years. Irish Bank Resolution Corporation Limited, the asset recovery bank created by the merger of Anglo Irish Bank and Irish Nationwide in 2011, was liquidated."

Fitch revised its Outlook on Ireland's 'BBB+' rating to Stable from Negative in November last year, citing progress in fiscal consolidation, external adjustment and economic recovery, and improved financing options.

"The risks to Ireland's credit profile that we noted at the time still apply. These include the need for significant further adjustment, the weak growth outlook, and continuing vulnerabilities in the financial sector." By Joe Downes