The uncertainty caused by Ireland's election result at the weekend will have no immediate effect on the country's high grade sovereign credit rating, S&P Global said on Tuesday, but could lead to higher spending policies.
The left-wing Sinn Fein Irish nationalist party stunned the establishment by beating the two centre-right parties that have led every government in Ireland's history and almost doubling its vote share from the last election to 24.5%.
Forming a new government could take weeks or months however, as those dominant parties, Fianna Fail and Fine Gael, had vowed during their campaigns not to govern with Sinn Fein, once the political wing of the Irish Republican Army (IRA) guerrilla movement.
S&P analysts said in a note that, "at this stage, the outcome of the Feb. 8 election has no immediate effect on our (AA-/Stable) sovereign credit ratings", though they also stated a further election was possible.
"The unprecedented fragmentation of Ireland's popular vote may shift its policy settings, including toward a more relaxed budgetary stance, despite still-high public debt," they added.
S&P upgraded Ireland's rating in November, saying it expected general government debt to drop to about 50% of GDP by 2022 from roughly 60% and due to "vigorous" economic growth, which has been among the strongest in the world in recent years.
That took Dublin's rating back to the 'high-grade' double-A bracket for the first time since its euro zone debt crisis bailout in 2010 saw debt balloon to over 130% of GDP in gross terms and S&P's peer Moody's cut the country to 'junk', or non-investment grade as it is formally known.
Ireland's low unemployment and surging house prices underscore its current boom, though ratings firms highlight that headline GDP figures are flattered by Apple and other U.S. tech firms booking intellectual property rights there, and by international aircraft leasing.
Fellow ratings agency Fitch agreed some fiscal loosening seemed likely after the election result and that while its projection for a continued fall in public debt levels accounted for significant increases in spending, it was subject to uncertainty on both the specific fiscal policy settings.
A reversal of the downward trend in government debt could be negative for the rating, although Ireland's resistence to external shocks is potentially rating positive.
S&P's note on Tuesday said any fiscal loosening under a new government coalition was likely be gradual and modest, and compliant with the European Union's Stability and Growth Pact, which is designed to limit overspending.
"Also, we do not foresee any significant revisions to Ireland's favourable corporate tax regime (supported by all three leading parties publicly)," which it said "has proven an irresistible draw for foreign multinationals, particularly from the U.S." (Reuters)