Moody’s – one of the three major credit ratings agencies – has changed its outlook on Ireland’s sovereign debt rating – and raised it from negative to stable. But despite that positive development, Moody’s has failed to upgrade the State’s debt rating from junk bond status to investment grade.
The National Treasury Management Agency (NTMA) has, quite rightly, taken issue with this decision. It has pointed out that, based on the financial market’s pricing of Irish bonds, Ireland’s sovereign debt deserves investment grade status: a rating the two other agencies (S&P and Fitch) have already given it.
Ireland hopes to exit the bailout programme later this year, and to regain full access to capital markets for the State’s borrowing needs. Clearly, it would be best placed to do so were all three ratings agencies to classify Ireland’s debt as investment grade.
This would not just mean a bigger market for Irish bonds – as many investment and pension funds cannot buy sub-investment grade debt. It would also encourage more foreign investors to hold Irish medium and long debt. At present non-residents hold just half of all such debt, down from 82 per cent in 2011.
Moody’s, it seems, might well change its mind on a credit rating upgrade, if Ireland continues to meet its targets for fiscal consolidation, and if the current slow rate of economic growth is boosted by an export-led recovery. The first matter remains within our control, and will be partly determined by the decisions that the Coalition makes in cutting spending and raising taxes in the budget.
The second, however, is largely outside our control, and will depend to a great extent on the pace of economic growth in Ireland’s main export markets. However, in that regard, survey findings yesterday, which showed a strong pickup in business activity in the euro zone – notably in Germany and France – provide renewed grounds for optimism about an export-led recovery.