Ratings move helps with debt burden
Downsides are many but debt issue is crucial
The morning rush hour on the M1 motorway near the Dublin Port Tunnel.
The economy is back in recession, the banks are broken and may well require more capital from taxpayers, one in seven people in the workforce is without work and public debt is touching €200 billion.
On top of this litany of woes, the State’s statisticians said yesterday that the value of goods exports fell in May to €7 billion, well below the monthly average over recent times – in 2011-12 that average was €7.6 billion. The one bright spot over the past half decade of recession – sales of goods and services to foreigners – has faltered this year. Sources of growth in the Irish economy are now fewer than ever.
State’s creditworthiness Against this backdrop, one of the big three global credit ratings agencies – Standard and Poor’s – yesterday decided that the State’s creditworthiness had improved. Has the mid-summer sun gone to the heads of the agency’s analysts?
The rational for their rosier assessment is that they believe Ireland’s government debt burden is likely to decline more rapidly, as a percentage of gross domestic product, than they had previously expected - from 122 per cent of GDP in 2013 but to decline to 112 per cent by 2016 (for reference, the Government’s most recent prediction for its indebtedness in 2016 is just one percentage point lower).
The better public finances outlook is, in turn, because the Government has consistently overperformed on meeting its annual budget deficit targets.
Underpinning all this is an assessment of the strengths and weaknesses of the economy, along with its future potential. S&P believes that the domestic economy is stabilising, the export economy is well positioned to benefit from a recovery internationally and that there exists a “strong consensus among the country’s largest political parties for fiscal consolidation and policies aimed at economic flexibility, competitiveness, and openness”.
While one could do more than quibble with some of these points, the S&P analysis is more interesting in its assessments of risks – both upside and downside.
It believes that the economy’s potential growth rate is greater than the 2 per cent that most economists think is the upper limit for most fully developed economies, benefiting from its “favorable demographics, its openness, and its labor and product market flexibility”.
There is much truth in this, even if for many decades Ireland never came close to its potential and could fail to do so again.
Of the downside risks, they assess “contingent liabilities from the financial sector, which are below 30 per cent of GDP, as ‘limited’, under our criteria”. That is just shy of €50 billion and hard to see how it could be considered limited.
All that said, this is a vote of confidence in the economy and the Government.
It matters even though credit agencies’ reputations have taken a battering, having got so much wrong in so many asset classes since 2007.
Inertia in the international financial system means that many investors still rely on the agencies to back up their investment decisions.
Standard and Poor’s improved assessment of the State’s creditworthiness can only help – however marginally – in reducing the cost to taxpayers of servicing the national debt.