The credit rating of the Irish Government has been raised to investment grade by Moody's the most influential of the international credit rating agencies. In a statement last night, Moody's said that it was upgrading Ireland's credit rating by one notch to Baa3, the lowest investment grade. Prior to the financial crisis Ireland held a AAA or "triple A" rating. The highest possible.
New York-headquartered Moody’s also changed the outlook for Ireland’s credit rating from stable to positive, holding out the prospects of a further upward re-rating later in the year.
Moody’s said the reasons for the upgrade were the growth potential of the economy and the Government’s exit from the EU-IMF bailout.
“The first driver of the upgrade is the recent acceleration of economic growth, which indicates an increased likelihood of securing the sustained long-term growth needed to achieve a turnaround in Ireland’s public finances. A key positive signal is the faster pace of employment creation, with the unemployment rate having dropped 2.7 percentage points from its Q2 2012 peak, despite a rise in the participation rate,” it said in a statement last night.
It also noted the Government’s ability to exit the bailout without a precautionary credit line, which it said “reflects that the government’s reform agenda stayed largely on track throughout the programme, despite weaker than expected domestic and external economic conditions”.
It said that it expects Ireland will hit its target of reducing its exchequer deficit to below 3 per cent of economic output by 2015. Other factors included the regaining of market confidence through the restructuring of the banking system. “As a consequence, our baseline expectation is that the government will need to provide very little, if any, of the capital that the Irish banks may need following the upcoming EU-wide stress tests, consistent with its Baa3 rating.” it said.
The only sour note was struck over the slow pace of the clean-up of the banking system . Moody’s warned that the pressure being brought to bear on the banks by the Central Bank is “ likely to increase foreclosures, impairing profitability and potentially dampening the housing market recovery”.
The positive outlook was attributed to an expectation of a sustained recovery in the Irish economy and signs of stronger growth coming through from the rest of Europe. If the economy grows rapidly enough to put Ireland's debt to GDP ration "on a firm downward path", then a further upgrade is likely.
“Downward pressure would develop... should the country’s fiscal consolidation process falter,” pushing the debt ratio significantly above its current level of roughly 100 per cent.
The Minster for Finance welcomed the announcement saying that it would benefit the economy by reducing the cost of credit.
“The decision by Moody’s ... reflects the significant progress that has been made in stabilising the public finances, restructuring the banking sector and, most importantly, growing the economy and creating jobs.
"Ireland is now rated at investment grade by all of the major credit rating agencies, highlighting the major improvement in investor sentiment towards Ireland. The change in the outlook accompanying Ireland's rating from stable to positive reflects Moody's expectation of a sustained recovery in the Irish economy and improved debt dynamics," said Mr Noonan.
He added that the upgrade would have benefits for the economy as a whole by putting downward pressure on the price of credit for companies and organisations in Ireland who were reliant on the financial markets for funding.
Tánaiste Eamon Gilmore said the upgrade was “another signal of confidence in the Irish recovery”.
Moody's is the last of the main credit rating agencies to upgrade Ireland . All three – including Standard & Poor's and Fitch – had cut Ireland's rating in the aftermath of the 2010 financial bailout from the IMF and EU.*
The re-rating by Moody’s clears the way for more conservative investors, particularly in the Middle and Far East, to buy Irish Government debt. Many of these funds are precluded from investing in Government debt if it does not have an investment grade rating from all three of the big credit rating agencies.
Speaking earlier yesterday at the launch of a new $100 million joint-venture investment fund between Ireland and China, Mr Noonan said: "A lot of Asian funds would like to invest in Irish government bonds, but they need all the ratings agencies to have Ireland at investment grade first. But I have no doubt that, before too long, there will be funds flowing from China to the Irish sovereign."
The yields on Irish bonds – a measure of investor appetite – have fallen steadily since it became clear late last year that Ireland would successfully exit its the bailout. The yield on the benchmark 10-year bond was 3.17per cent at the close of trading last night. The impact of the Moody’s re-rating will not be clear until markets reopen again on Monday.
The National Treasury Management Agency – which raises and manages debt for the Government – raised €3.75 billion last week in its first foray into debt markets since Ireland exited the bailout on December 15th. The NTMA is not expected to look to raise more debt in the short term.
"I am pleased to note that one of the main drivers for today's upgrade was Ireland's restored market access,'' the NTMA chief executive John Corrigan said last night. "The change to the ratings outlook represents a positive context for future rating reviews."
Moody's also upgraded the debt ratings of the National Asset Management Agency, whose debt is guaranteed by the Government, to investment grade and its outlook to positive.
*This article was amended on January 19th 2014 to correct a factual error.