Ireland’s Annual Credit Report Reflects Significant Financial Deterioration

In its annual credit report on Ireland, Moody’s Investors Service says that the country’s Ba1 rating reflects the significant deterioration in the government’s financial strength following the crystallisation of contingent liabilities in the banking sector and a severe economic contraction. On the basis of Ireland’s fiscal consolidation plan and the country’s lacklustre economic outlook, Moody’s expects its debt/gross domestic product (GDP) to peak at around 120% in 2013-14. Ireland’s modest economic growth prospects are driven by the ongoing fiscal consolidation process and the limited availability of private-sector credit.

There are a number of key factors that support Ireland’s Ba1 rating. First, the country’s relatively predictable policy framework, its commitment to fiscal consolidation and structural reforms, and its success in achieving all of its objectives under the fiscal adjustment required by the EU/International Monetary Fund (IMF) programme, account for an assessment of high institutional strength.

Second, Moody’s highlights the economy’s competitiveness, its business-friendly tax environment and the labour market’s flexibility as reflected by the considerable wage adjustment that occurred during the crisis. However, while Ireland’s supply-side characteristics are favourable, uncertainty remains over whether the economic environment with its demand-side weaknesses will allow the Irish economy to leverage its strengths in terms of flexibility and competitiveness.

Moody’s also notes that Ireland has sufficient funding under the EU/IMF support package to cover all its financing requirement until the end of 2013. Moreover, it has made preliminary steps in an attempt to return to markets on a sustained basis, from which it had been excluded since October 2010. Nevertheless, the rating agency expects that the end of Ireland’s current EU/IMF support programme at year-end 2013 will prompt the need for official financing being available, possibly in the form of a precautionary programme.

The negative ratings outlook reflects the implementation risks to the country’s deficit-reduction plan, particularly in light of the continued weakness in the Irish economy. Moreover, the broader euro area debt crisis complicates the government’s fiscal consolidation efforts. These challenges also account for Moody’s assessment of Ireland’s high susceptibility to event risk.

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