Cantillon: Moody’s upgrade no market irrelevance

The decision by Moody’s to upgrade Ireland’s debt rating will come as a boost to the Government. When the National Treasury Management Agency managed to sell €750 million of six-year borrowings at an interest rate of below 0.2 per cent during the week, Minister for Finance Michael Noonan was not slow to point out that investors were happy to buy on the basis of the new Government and its programme. Likewise Moody’s move will be seen as a vote of confidence, particularly as analysts in Dublin had expected the agency to hold off until after the Brexit vote at the end of June, where a vote to leave would carry economic dangers for Ireland.

It would be churlish to dismiss the Moody’s upgrade as some kind of market irrelevance. The usefulness of ratings agency remains open to question in the wake of the economic collapse, but they do have impact on the market. With a high debt, we need all the help we can get to keep raising borrowings as cheaply as possible. And good ratings help, even if most investors will also do their own detailed analysis.

Yet we have to realise, too, that we continue to live in a very odd world of rock bottom interest rates, no inflation and a huge programme of ECB support for government bond markets. Such is the scale of ECB buying that it seems it has recently struggled to get hold of Irish bonds in sufficient numbers. For as long as we have a massive buyer in the market, who will hover up spare bonds in the secondary market, the interest on our debt will remain low. This is not so much a vote of confidence in the new Government and its programme as a recognition of the old reality that you don’t bet against the house. Investors will also be mindful that EU rules will limit the room for manoeuvre of the Irish Government in framing its annual budget and ensure the deficit and the debt burden continue to head in a downward direction.

What the Government does and the message it sends out is important, too. Investors will trade our bonds versus those of, say, France, Belgium, Italy and Spain, assessing the risk and return on each. Were Brexit to happen, the messages coming from Dublin would be vital: that we weren’t following Britain out the door and were a long-term member of the euro.

If Brexit is avoided, then we will have a precious window of rock bottom rate to help cut our debt burden. It won’t, however, last forever.