Fitch Downgrades Ireland to 'A+'; Outlook Negative
>2010-10-06 11:04:30.471 GMT
>FITCH DOWNGRADES IRELAND TO 'A+'; OUTLOOK NEGATIVE
>Fitch Ratings-London-06 October 2010: Fitch Ratings has
>downgraded the Republic of Ireland's (Ireland) Long-term
>foreign and local currency Issuer Default Ratings (IDRs) to
>'A+' from 'AA-' respectively. The Outlooks on the Long-term
>IDRs are Negative. Fitch has simultaneously downgraded
>Ireland's Short-term foreign currency IDR to 'F1' from 'F1+'.
>The Euro Area Country Ceiling of 'AAA' remains unchanged. The
>notes issued by the National Asset Management Agency (NAMA)
>have also been downgraded to 'A+'
>from 'AA-' and to 'F1' from 'F1+', in line with the sovereign ratings.
> >"The downgrade of Ireland reflects the exceptional and
>greater-than-expected fiscal cost associated with the
>government's recapitalisation of the Irish banks, especially
>Anglo Irish Bank," said Chris Pryce, Director in Fitch's
>Sovereign Group. "The Negative Outlook reflects the
>uncertainty regarding the timing and strength of economic
>recovery and medium-term fiscal consolidation effort."
>Typically a Negative Outlook implies a slightly greater than
>50% probability of a further downgrade over a 12-24 month
>horizon. The triggers for a revision of the Outlook to Stable
>would be evidence of sustained economic recovery and fiscal
>consolidation. The ratings could be downgraded further if the
>economy stagnates and broad-based political support for and
>implementation of budgetary consolidation weakens.
>Fitch believes that the latest government estimate - announced
>on 30 September - of the fiscal cost of recapitalising Irish
>banks and the transfer of assets to NAMA are plausible,
>particularly if account is taken of the additional EUR5bn
>estimated for the stressed case. Moreover, the large cash
>buffer of more than EUR20bn, around EUR14bn of uncommitted
>funds of the National Pension Reserve Fund (NPRF) as well as
>ongoing bank funding support from the ECB means that Ireland
>still retains considerable financial flexibility. Despite the
>weak performance of the economy, the underlying budgetary
>position remains in line with the targets set out in the 2010
>Budget and Fitch expects a further strengthening of the fiscal
>consolidation effort to be set out by the Minister of Finance
>On the basis of its central case, the government's total
>direct bank bailout costs will rise to EUR45bn from the
>EUR23bn assumed at the time of Fitch's last rating action on 4
>November 2009. Of this EUR45bn, EUR29.3bn will be on account
>of Anglo Irish Bank ('BBB-'/RWN), already 100%-owned by the
>state. The remainder will be spread over the other four Irish
>banks. In some cases government assistance has been given
>indirectly by the state-owned NPRF in which case the
>transactions will show up as a rise in net debt, rather than
>the more commonly used gross debt measure.
>General government gross debt (excluding debt issued by NAMA
>to fund asset transfers from the banks) will rise to 99% of
>GDP at end-2010 from the 78% previously predicted by the
>government. This increase is explained by the issuance of
>promissory notes to re-capitalise Anglo Irish Bank and Irish
>Nationwide Building Society in 2010 and by a downward revision
>to the estimated level of nominal GDP for 2010. While the
>promissory notes have an immediate full impact on the stock of
>gross debt, their funding cost is spread over a 10-15 year
>period. Net government debt that takes into account the
>government's cash buffer and the assets of the NPRF is
>forecast to be around 76% of GDP by year-end (90% excluding
>NPRF assets). Moreover, though the cost of bank
>recapitalisation is much greater than anticipated, the
>estimated cost of transferring assets to NAMA has consequently
>fallen to EUR31bn from EUR54bn.
>NAMA debt is not formally counted as part of government debt
>(though it is guaranteed by the state). However, it does
>represent a significant contingent liability. Fitch believes
>it is reasonable to assume that NAMA will over the long-term
>break-even given the average 58% discount that has been
>applied to transferred assets compared with an original
>forecast of around 30%.
>The broad general government deficit for 2010 will be
>equivalent to an unprecedented 32% of GDP. However, in large
>part this reflects a ruling by the European statistical
>agency, Eurostat, that the issue of promissory notes by the
>government to the banks should be treated as 'above the line'
>budgetary expenditure. Fitch believes stripping out these
>one-off transactions provides a more appropriate measure of
>the underlying fiscal position which is now forecast to be a
>deficit of 11.9% of GDP, close to the initial government
>forecast for 2010.
>A key element of strengthening confidence in the
>sustainability of public finances over the medium-term will be
>the announcement in early November of a 'four year profile'
>(2011 to 2014) for the budget including details of the
>adjustment necessary in terms of tax revenue as well as public
>Broad-based political support would help strengthen the
>credibility of the medium-term fiscal consolidation effort.
>The timing and strength of economic recovery is also critical
>to firmly placing public finances on a sustainable path. A
>rebalancing of the economy is underway.
>Ireland is regaining its international competitiveness lost
>during the 'boom'
>years and the current account of the balance of payments is
>expected to move to balance during 2011. Moreover, the drag on
>growth from the collapse of the construction boom has mostly
>run its course. Nevertheless, the ongoing distress in the
>housing and commercial real estate markets, household sector
>de-leveraging and the uncertainty over the global economic
>outlook, especially important given Ireland's open and
>internationally orientated economy, weigh on growth prospects
>and fiscal outlook.