We have warned investors repeatedly in 2011 and 2012 that the pressure on the credit ratings in Europe likely will continue. That may be true, but as over the past six weeks we have started to see some additional evidence of stabilization in Europe. This is even true for the PIIGS (Portugal, Italy, Ireland, Greece and Spain). A fresh report from Fitch Ratings may not be an upgrade of Ireland, but it should still be considered good news for a land that has almost nothing but bad news for years.
Fitch shows that Ireland’s agreement to replace the promissory notes provided to Irish Bank Resolution Corp. is positive for the sovereign. The report said, “It reduces refinancing needs, eases medium-term fiscal pressure and makes Ireland’s public finances more transparent.”
Again, this is not really an upgrade. Fitch even went on to warn that it has limited impact on Ireland’s debt stock, even though it significantly cuts the Irish sovereign’s funding requirement. It was last November that Fitch revised the outlook on Ireland’s BBB+ rating to Stable from Negative.
The government estimates it will have to borrow less than 1 billion euros per year to service the interest on the new government bonds, compared with payments of more than 3 billion euro per year on the promissory notes. The Irish government estimated that the interest saved on the new government bonds (compared with the promissory notes) would be worth some 1.1 billion euros in 2013, followed by 900 million euros in 2014, and 700 million euros in 2015. By both 2014 and 2015, the result should lower the government’s budget deficit by 0.6% of gross domestic product.
By extending the average duration of the sovereign’s total debt stock (by approximately three years, to more than 10 years), Ireland will have one of the highest average maturity profiles among Fitch-rated sovereigns.
Fitch did note that the risks to Ireland’s credit profile that were discussed in November still apply. These include the need for significant further adjustment, the weak growth outlook and continuing vulnerabilities in the financial sector.
Again, this was no upgrade, but sometimes good news does not really have to be that great.