Brexit and debt threaten strong economy, warns Moody’s

Credit ratings agency rates the Republic a safe bet for lenders

Brexit risk: trucks wait to be loaded onto a ferry at Dublin Port. Photograph: Artur Widak / Getty Images.

Brexit risk: trucks wait to be loaded onto a ferry at Dublin Port. Photograph: Artur Widak / Getty Images.

 

Brexit and the Republic’s €200 billion-plus national debt threaten the strong economy, ratings agency Moody’s warned on Tuesday.

Moody’s, which assesses businesses’ and countries’ creditworthiness, ranks the Republic as A2 stable in its latest analysis, indicating there is a low risk of the State defaulting on its debts.

Sarah Carlson, Moody’s senior vice president and lead sovereign analyst for the Republic, attributes this to robust economic growth and prudent policies, in her latest opinion on the State’s finances.

Nevertheless, she warns that the Republic’s susceptibility to fall out from the UK’s planned exit from the EU next October, and high public and private debt, threaten the economy and pose a risk to the State’s good credit rating.

Ms Carlson also highlights high wage and credit growth along with possible global corporate tax changes, as potential threats.

“Our credit view of Ireland balances the strong growth and fiscal track record of the past few years and our expectation that the positive trends will continue,” she says.

Challenges

“However, challenges remain in the form of still elevated high public debt levels and a relatively high degree of economic volatility.”

Fears of a no-deal Brexit are growing as Britain’s Conservative Party government and prime minister Boris Johnson want the EU to ditch a backstop meant to keep open the Border between the Republic and Northern Ireland, before agreeing exit terms.

The Irish Central Bank recently predicted that a hard Brexit could cut the the number of new jobs created in the Republic by 34,000 and slow economic growth to 0.7 per cent from 4.1 per cent next year.

Ms Carlson says that 11 per cent of exports went to the UK last year while the two countries share deeply integrated supply chains.

She predicts that a switch from the EU single market to World Trade Organisation rules, likely to include tariffs, in a no-deal Brexit “would have a highly negative impact on the Irish economy”.

Brexit poses problems for State finances, as the Government has to consider two directions for October’s budget depending on whether the UK crashes out of the EU or leaves the bloc with a deal.

Ms Carlson indicates that spending on homes and infrastructure could slow the rate at which the Government repays the national debt, which is partly a hangover from the financial crisis that struck a decade ago.

Bad loans

The Republic’s national debt is €215 billion while the Government expects to spend €2.4 billion more than it collects in revenues this year as it boosts investment in infrastructure.

The analyst argues that tackling other crisis-era leftovers, such as the high number of bad loans on Irish banks’ books, would help improve the Republic’s credit rating.

Ms Carlson highlights changes in global tax rules as another risk as the Republic’s low 12.5 per cent tax on company profits has helped lure job-creating multi-national investors to its territory.

High credit ratings from agency’s such as Moody’s should make lenders more willing to loan money to the State and its agencies, while helping to keep down the interest charged on these debts.

Ms Carlson’s opinion was not a “ratings action” which is where Moody’s changes or re-affirms its assessment of a country’s creditworthiness based on recent events.