Moody's favours post-bailout programme


IRELAND WOULD have a better chance of accessing the bond markets fully again at the end of EU-International Monetary Fund bailout programme if it took the precaution of seeking a follow-up programme, according to credit rating agency Moody’s.

Dietmar Hornung, a credit analyst at Moody’s, said last month’s sale of government bonds was a positive development but the offer of further external support may be required when the programme finishes at the end of next year.

“As we understand, it is an option for policymakers to seek a follow-up programme, potentially more in a precautionary sense,” he said in an emailed response to questions put to the ratings agency by The Irish Times.

“For a country to re-access the market, obviously the availability of a backstop would be positive.”

He was responding to a question on whether the raising of €5.2 billion, including €4.2 billion of new money, on the sale of government bonds last month had changed Moody’s view that Ireland may still require further support at the end of the programme.

Moody’s expects Ireland to have a budget deficit of 8.6 per cent for 2012, which Mr Hornung said was still high in European terms and meant that “significant” fiscal consolidation still had to be delivered.

“This consolidation could have a negative feedback loop on economic activity,” he said.

“Moreover, in Ireland’s post-bubble economy, there is still some uncertainty about the loan portfolios of the banks.”

He said there was uncertainty in particular around tracker mortgages, which account for €52 billion of loans at Bank of Ireland, AIB and Permanent TSB, or more than half their mortgage books.

Moody’s, the only of the three main ratings agencies to grade Ireland at “junk” status, had expected the Government to access the markets again this year. The fact this was achieved was “reassuring”, said Mr Hornung, but Ireland was “rightly positioned” at junk status. He declined to speculate on what it would take to upgrade Ireland.

There had been improvements in some areas and deterioration in others since Moody’s downgraded Ireland to junk and a “Ba1” rating just over a year ago, he said.

“On the positive side, Ireland complied with the troika’s fiscal targets,” said Mr Hornung.

“However, the economic outlook has deteriorated relative to the expectations in July 2011.”

The interest rate or yield on the benchmark nine-year government bond rose slightly yesterday but still remained less than 6 per cent, a level it dropped below on Tuesday for the time since Ireland entered the bailout programme.

The rate has fallen from 14 per cent in July 2011, reflecting the increased appetite among investors to buy Government debt as they become more encouraged about the prospect of a recovery in the Irish economy and a full return to the international bond markets.

The raising of €5.2 billion on bond sales last month has meant that the Government has covered most of the €8.2 billion bond falling due in January 2014 which had been seen as “a funding cliff”.

The National Treasury Management Agency plans to sell amortising bonds linked to Government debt for the first time, possibly as early as today, due to interest from Irish pension funds.

The State agency expects to earn between €3 billion and €5 billion over the next 18 months from the sale of the amortising bonds, which offer investors a steady stream of principle and interest, and inflation-linked bonds.

Moody’s said in a research note earlier this month that Ireland still had “a long way to go” before reducing its deficit to less than 3 per cent of gross domestic product in 2015, which it said would be “a significant challenge”.

The Government’s exposure to the “ailing” banking sector remains large and the financial environment was not conducive to the planned sale of State assets, it said. Also the domestic economy would take a long period to recover amid high unemployment and subdued growth among Ireland’s economic partners.