Ireland restoring reputation on credit

Retrofitting Irish banks

Meanwhile, Michael Noonan reminded us that discussions regarding the retrofitting of ESM capital into the viable Irish banks are “at an early stage”, the ultimate upshot of which being a potential clawback (€16 billion – €17 billion) to the State of the €33 billion injected, of necessity, into AIB, Permanent TSB and Bank of Ireland.

The enormity of such concessions are only now beginning to dawn on bond market participants, if not yet the public at large.

The term loan extensions and interest costs soon to be appended to Ireland’s combined promissory note and troika obligations imply that €90 billion, or 50 per cent of outstanding net debt, will be set at ultra-low coupon payments (3-3.25 per cent) and ultra-long maturities for capital redemption (30-32 years).

Suffice to say that the Irish sovereign has never enjoyed such beneficial funding terms, not even during those halcyon days of a AAA-rated Tiger.

Furthermore, while Ireland’s gross debt/GDP ratio is expected to peak this year at around 120 per cent, this falls to 106 per cent net of those burgeoning cash balances in the exchequer accounts.

If a deal is ultimately struck to dispose of the State’s “investments” in Irish banks to the ESM (or perhaps to some third party flushed out by proceedings), Ireland’s net debt/GDP ratio can peak at around 96 per cent of GDP, within touching distance of the 94.5 per cent average forecast for the euro zone as a whole in 2013.

This, remember, at the culmination of a near six-year catastrophe which severely blighted the nation’s banks, real economy and public finances.

With the average credit rating for euro zone sovereigns in the A+ zone, and Ireland’s prospective debt servicing burden substantially lower than most (given the bonhomie of our troika financiers), it is plain that Ireland’s depressingly low credit rating is now on an upward trajectory. Fitch’s decision last November to upgrade Ireland to “stable” outlook as a BBB+ investment grade credit was the first positive overture towards any euro zone sovereign since the debt crisis began.

This week, SP has followed suit.

It is now aligned with Fitch in its assessment of Ireland’s improving creditworthiness.

This leaves Moody’s as an increasingly anachronistic outlier, three notches lower than everyone else in their sub-investment grade obduracy.

Its prior basis for such an assessment (viz haircut threats to private creditors) is no longer tenable.

Moody’s was obliged to publicly acknowledge the “credit positive” nature of last week’s promissory note deal, the latest in a very long line of “credit positive” developments that have as yet, and somewhat mystifyingly, failed to trigger a ratings upgrade. That day will come, and soon.

In the interim, let us marvel at such entirely appropriate nomenclature for this Washington-based rating agency!

* Donal O’Mahony is global strategist at Davy