RPT-Fitch: EU deficit rule anchors post-bailout Irish fiscal policy

Tue Dec 17, 2013 7:03am EST

Dec 17 (Reuters) - (The following statement was released by the rating agency)

The EU's Excessive Deficit Procedure will serve as a medium-term anchor for Irish government fiscal policy, following the successful termination of the three-year EU-IMF programme two days ago, Fitch Ratings says. We therefore anticipate further fiscal consolidation in 2014 and 2015, in line with the 2014 budget.

Meeting the requirement of an overall deficit of less than 3% of GDP by 2015 will require substantial fiscal consolidation. This implies a cumulative 5pp reduction in the primary balance compared with 7pp achieved so far during 2009-2013.

Delivering this planned consolidation would help ensure public debt sustainability, supporting Ireland's 'BBB+'/Stable rating. Ireland has exited its bailout programme facing high debt and slow growth (we forecast 1% real GDP next year and estimate the medium-term growth potential around 2%), implying that declining debt requires a prolonged period of large primary surpluses. We forecast gross general government debt to GDP to peak at 122% in 2014.

Ireland's 2014 sovereign obligations are pre-financed as the sovereign has successfully returned to market financing at favourable rates. Fitch expects market access will be maintained.

The economic recovery is fragile and bank sector risks have not yet disappeared, although we expect Bank of Ireland and AIB to return to profitability in 2014, thanks in part to a fall in funding costs since 2H12. Internal capital generation would help the banks meet future regulatory capital requirements and make capital ratios sustainable.

However, Fitch believes that the banks will increase their levels of impairment charges during 4Q13, which will affect 2013 performance following a balance sheet assessment by the Central Bank of Ireland. These additional impairments should place the banks in a better position to withstand the EBA's Asset Quality Review and stress tests during 2014.

We expect loan impairment charges to stabilise and then fall gradually and non-performing loans to peak next year. A reducing unemployment rate and changes in legislation, including the credible threat of home repossession, could help improve asset quality. But NPLs remain high and challenges remain, including regulatory pressure to resolve forborne mortgage loans and long-term arrears, and the volume of property that banks will have to manage as non-performing loan collateral.

2014 could be a crucial year for Irish residential mortgage performance, with a peak in arrears possible. Increased clarity around measures for dealing with arrears cases will provide incentives and sanctions for both banks and borrowers. Fitch believes that repossessions will be used as a last resort, as banks are showing willingness to work with borrowers to achieve the best outcome for both sides.

We discussed our Irish sovereign credit view and our outlooks for Irish banks and the Irish mortgage market on a teleconference on 16 December. A replay and the accompanying presentation are available at www.fitchratings.com.

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