Business

Saturday 21 October 2017

Debt is keeping a lid on Ireland's credit ratings

Colm Kelpie

Colm Kelpie

IRELAND's credit ratings continue to be constrained by the country's high level of debt and the extent of the bad loans in the banks, Moody's Investor Service has warned.

It forecast about 14pc of government revenues this year and next year will go towards the interest payments on the debt.

The agency also warned that a deterioration in the economic outlook or disruption in the markets would put our rating at risk of being downgraded.

Its regular credit opinion update to the markets said the agency's fundamental concern was about when the Irish economy could regain growth momentum to slash its debt burden. But it did say that the country would only need to obtain precautionary credit from Europe when the bailout finishes at the end of the year.

Limits

"The Irish Government's ratings continue to be constrained by the country's high levels of debt and the continued poor asset quality of the banking system, which limits the availability of credit," the agency said.

"At these debt levels, Ireland remains vulnerable to both domestic and external shocks."

The comments come just days after Standard & Poors raised its outlook for Ireland, but did not change its rating.

The positive S&P move contrasted with Moody's, which reaffirmed its negative outlook earlier this year.

The Moody's commentary outlined what potential events could lead the global ratings agency to upgrade or downgrade its rating for Ireland.

It said pressure to upgrade could come if the country was able to cut its debt and tap into the international money markets on a full-time basis. But it warned a downgrade would come if the Government did not meet its budgetary targets.

"A further deterioration in the country's economic outlook would also exert downward pressure on the rating, as would a market disruption resulting from an event like a Greek exit from the euro area," it said.

Credit strengths in Ireland include a business-friendly environment and a competitive tax system, it said, while challenges include restoring financial strength during a period of low growth, as well as rehabilitating the banking sector and the housing market.

Moody's said the contribution of exports to growth was likely to be less than expected this year, but that "positive" trends in employment should support a modest growth in domestic demand as well as a reduction in "precautionary" household savings.

Investment is expected to bottom out this year also.

"Downside risks to these forecasts include weaker-than-expected growth for Ireland's trading partners and a lack of lending by the financial sector due to adverse financing conditions and insufficient progress on loan restructuring efforts currently under way," the credit opinion said.

Stockbrokers Goodbody said that, while a ratings upgrade was more likely than a downgrade, it was not likely to happen in the short term.

Davy, meanwhile, said it was significant that Moody's did not include access to a precautionary credit line after we leave the bailout as something that could lead to upward pressure on the rating.

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