Sunday 25 March 2018

Moody's warns budget discipline is now key risk to Irish recovery

Moody's is now unlikely to move the Irish sovereign's rating before May next year. Photo: Bloomberg
Moody's is now unlikely to move the Irish sovereign's rating before May next year. Photo: Bloomberg
Donal O'Donovan

Donal O'Donovan

The as yet unknown budgetary policies of the next government represent the key risk to Ireland's public finances, analysts at Moody's have warned.

Moody's, the last of the big credit agencies not to have returned Ireland to a top-rated "A" credit status, is now unlikely to move the Irish sovereign's rating before May next year - well after a new administration is in place.

"The key risk (to Irish finances) is the fiscal policy of the next Government. We will monitor any indications of a return to boom era policies," Moody's sovereign rating analyst for Ireland, Kathrin Muehlbronner, said yesterday.

The comments contain an echo of last week's warning from the Fiscal Advisory Council, that the mix of taxing and spending within Ireland, rather than external forces, are now the most potent factor in the economy here.

"We would be concerned to see any indications of pre-crisis policies begin to re-emerge. I don't think we have seen that so far," Ms Muehlbronner said.

Under new European rules each of the main rating agencies now works to a pre-set calendar when they revise national ratings. The dates are not published in advance, but it is understood January and May 2016 are pencilled in as the times Moody's will make any Irish changes.

January falls close to the election so a change in Ireland's rating is not likely until May.

The possibility of Britain voting to quit the European Union, with potentially huge consequences for Ireland, and a global push towards tax harmonisation are smaller risks, over the short term.

The recovery in the Irish economy is a major positive but high levels of debt and the potential for volatility in a small, open economy mean significant risks remain, Moodys said.

The State has benefited from a reduced cost of borrowing as a result of European Central Bank policies, making even the current high debt level easier to service, but that may not last.

Growth rates, which have rebounded since the crash, are likely to slow.

"Ireland is moving in a positive direction. It is clear the current growth rate is not what you are going to see over the medium term."

Moves in Europe and across the developed world to harmonise corporation tax could pose a danger to Ireland.

"Because the tax system is a competitive advantage for Ireland we will monitor what is happening. It (tax harmonisation) is not a risk right now but it would be an issue to monitor," Ms Muehlbronner said.

Irish Independent

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