Wednesday 24 January 2018

Ireland eyes 'A' rating as borrowing costs fall

The Standard and Poor's building in New York.
The Standard and Poor's building in New York.
John Corrigan, CEO of the National Treasury Managment Agency. Pic Frank Mc Grath.
A sign for financial ratings agency Fitch Ratings. Photo: Jason Alden/Bloomberg
Donal O'Donovan

Donal O'Donovan

IRELAND’S borrowing costs fell below the rate being charged to the UK on the markets yesterday as investors greeted Moody’s decision to raise the rating on Irish bonds from junk.

The fall in the cost of borrowing means that investors would lend to our Government at the same rate they charge the US for five-year loans.

As costs fall, analysts say this country could regain its “A” credit ratings as early as next year from two of the three main agencies.

The yield on five-year Irish bonds fell to 1.64pc yesterday, compared to 1.63pc for the US and 1.71pc for the UK.

It is the first time since the global financial crisis that Irish borrowing costs have slipped below the UK, though historically it was not unusual, said Donal O'Mahony of Davy Stockbrokers.

The swing caught observers’ attention on the markets yesterday, Mr O’Mahony said. But he stressed that direct comparisons between countries with different official interest rates are complicated.

Central banks in the US and UK set their own interest rates and both are expected to raise them over the coming months and years. On the money markets investors are already demanding higher yields as a result

In contrast, the European Central Bank (ECB) which sets interest rates here has indicated that it will hold interest rates at low levels well into the future, keeping rates lower for euro borrowers.

Irish government bonds are now trading at levels that indicate further ratings upgrades from Standard & Poors and Fitch are being factored in by investors, according to the head of strategy at Dutch bank ING.

The yield, or implied borrowing cost, on 10-year government bonds fell to 3.26pc – down from 3.5pc just two weeks ago.

“A return to “single A” ratings in 2015 is now doable for Ireland,” ING's Padhraic Garvey told the Irish Independent.

The combination of a primary budget surplus next year, which ING expects, with reduction of the budget deficit to just 3pc would be enough to drive the further upgrades, he said.

Even our high national debt – which is set to peak at almost 125pc of the size of the economy – is not a barrier to upgrades next year, as long as the numbers are seen to be improving, Garvey said.

However, he warned that the recovery in bond prices has come so far and so fast that any negative shock, such as bad economic or banking news, could lead to a backlash that would be felt as a rise in borrowing costs.

The three main rating agencies all class Irish government bonds as “investment grade” following Friday's upgrade from Moody’s.

The head of the National Treasury Management Agency John Corrigan said yesterday that the first of a series of bond auctions will be announced in the coming weeks, with a target to raise €4bn this year.

Moody's lifted its rating of Irish government debt to Baa3 – a so-called investment grade that suggests a moderate risk of

default – and said Ireland now has a positive ratings outlook.

The new rating is in line with the BBB rankings applied by Fitch and Standard & Poors.

A single “A” rating would move Ireland further up the quality scale for investors, suggesting only a low risk of a debt default.

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