Fitch says timing of Irish return to markets 'unclear'

Tue, Jun 5, 2012, 01:00

THE TIMING of Ireland’s return to borrowing in the international markets and the cost of that borrowing remains unclear, despite the Yes vote in the fiscal referendum being positive for the country, according to the credit ratings agency Fitch.

The public endorsement of the EU fiscal compact “removes a potential source of considerable uncertainty about Ireland’s future funding” as the vote has removed the immediate concern about where Ireland could find a second bailout, Fitch said.

The agency said that a No vote would have “increased downward pressure” on Ireland’s “BBB+” rating because it would have stopped the State receiving funds from the permanent EU bailout fund, the European Stability Mechanism, after the EU-IMF bailout programme ended in 2013.

Fitch said, however, that the vote had not increased the chances of Ireland’s credit rating being upgraded.

The agency still has Ireland on a negative outlook, meaning that its credit rating could be downgraded again. “It does not change Ireland’s fiscal situation, with the country set to run a large deficit for some time,” said the agency.

“Export-orientated Ireland is exposed to an economic downturn in its major European trading partners, thought its improving competitiveness mitigates the impact of such adverse external shocks.

“And with yields on Irish Government bonds maturing after 2013 in excess of 7 per cent, the timing and cost of Ireland’s return to the debt markets remain unclear.”

On a positive note, Fitch said Ireland had “stayed on track to meet and even exceed the underlying fiscal targets of the EU-IMF programme”.

The agency has forecast that Ireland’s deficit would be 8.6 per cent of GDP this year, down from the headline deficit of 13.1 per cent of GDP last year, which was “significantly higher than previous estimates due to bank-related payments”.

“The strong political support for, and broader public acceptance of, a long-term fiscal consolidation plan have supported the adjustment process so far.

“Thursday’s Yes vote, which was backed by most mainstream/moderate political parties, is another expression of this.”

Fitch said the outcome of the referendum was “marginally positive” for the euro zone as a whole but that it “does not add to the voter discontent with fiscal consolidation and reform that characterised, for example, the Greek elections on May 6th. However, nor is it likely to significantly alter this dynamic in the rest of Europe.”

The Government still plans to re-enter the bond markets before the end of this year, despite the growing turmoil in financial markets over Spain’s deepening banking and economic crisis.

A spokesman for the National Treasury Management Agency said the Government still planned to sell treasury bills, which would raise short-term borrowings, “during the summer”. An announcement on the sale of so-called T-bills was expected to be made shortly after the outcome of the fiscal referendum.

To avoid a second bailout, the Government must re-enter the markets to raise some €36 billion to fund repayments and the exchequer deficit for the two years after the bailout programme ends.

The State is facing €18.5 billion of funding requirements in 2014, including €8.3 billion for a bond to be repaid in January 2014, and a further €17.5 billion during 2015 based on deficit estimates published in last year’s budget.

This includes funding a €10.2 billion deficit in the exchequer finances in 2014 and €7 billion in 2015. The State has to repay €6.9 billion of borrowings drawn under the EU-IMF programme and €3.5 billion on redemptions in sovereign bonds in 2015.