Business Irish

Friday 20 April 2018

Debt Crisis: Ratings agency Fitch upbeat on Ireland if bank debt deal reached

Marc Jones and William James

IRELAND could claw its way back into the single-A rating band if a deal is struck to share the burden of its banking debts, ratings agency Fitch said today.

But it also warned the United States faces a "material risk" of losing its triple-A status if there is a repeat of the wrangling seen in 2011 over raising the country's self-imposed debt ceiling, credit ratings firm Fitch said on Tuesday.

There was a more positive scenario for Ireland, which was bailed out by the European Union and International Monetary Fund in 2010 when the cost to the state of rescuing the country's banking sector spiralled.

If these debts could be shared out among euro zone states through the region's bailout mechanisms there could be scope for Ireland's BBB-plus rating to rise into the single-A category, according to Fitch analyst Douglas Renwick.

"If there is an element of risk sharing, say perhaps through the ESM.”

Fitch currently has a negative outlook on the US.

Standard & Poor's has already downgraded the world's biggest economy, lowering the United States to AA+ in August 2011 - a move which appears to have done little to dull the attraction of U.S. bonds for investors. Moody's Investors Service shifted the outlook on its Aaa rating to negative in the same month and has kept it there ever since.

Riley said the United States did not need the same kind of super-strength austerity some major developed economies are currently implementing because it was grinding out more economic growth than other high-debt nations.

But he warned a repeat of the 2011 squabble would undermine confidence in Washington.

"It is a concern that these self-inflicted crises are seeing us stagger every six months to a new deadline," Riley said.

"That uncertainty over economic and fiscal policy is something that is not typically characteristic of triple-A, and more substantively we think it is weighing on the prospects for growth and the recovery."

Fitch also said Spain will continue to face downgrade risks even if it avoids having to ask for a bailout, while Despite December's deal by U.S. politicians to avoid the so-called "fiscal cliff" of spending cuts and tax hikes, Fitch's head of sovereign ratings, David Riley, said pressure on the country's rating was increasing.

On BBB-rated Spain, Riley said the downgrade risks were its ability to deliver on deficit reduction, the cost of bank recapitalisation and, most significantly, economic performance.

"It's the economy. If this time next year the expectation is for another 1.5 or 2pc contraction in the economy and unemployment getting towards 30pc, it's very bad times," Riley said.

"Those are the drivers, even if in that scenario they are still able to fund themselves in the market because of the spectre of OMT."

The European Central Bank has committed to make unlimited purchases of government bonds, known as Outright Monetary Transactions (OMT), to support any euro zone sovereign that enters into an international bailout programme.

The promise of a backstop has helped slash the cost of borrowing for indebted euro zone sovereigns such as Spain since it was announced by the ECB in September.

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