(The following statement was released by the rating agency)
Feb 8 - Ireland's agreement to replace the promissory notes provided to
Irish Bank Resolution Corporation (IBRC) is positive for the sovereign, Fitch
Ratings says. It reduces refinancing needs, eases medium-term fiscal pressure
and makes Ireland's public finances more transparent. However, it has limited
impact on Ireland's debt stock.
The agreement significantly cuts the Irish sovereign's funding requirement. The
government estimates it will have to borrow less than EUR1bn a year to service
the interest on the new government bonds, compared with payments of over EUR3bn
annually on the promissory notes. It also simplifies the complex and opaque
arrangements including ELA loans parallel with the promissory notes that have
been in place since the financial crisis.
The Irish government estimates the interest saved on the new government bonds
compared with the promissory notes to be worth about EUR1.1bn in 2013, EUR0.9bn
in 2014, and EUR0.7bn in 2015. In 2013, the savings are cancelled out by the
estimated costs of liquidating IBRC, but in both 2014 and 2015, the result
should be to lower the government's budget deficit by 0.6% of GDP.
Lower cash flow financing needs and greater transparency can add to the positive
momentum behind Ireland's push to regain full bond market access (our base case
already assumes this will happen by the end of 2013). Nevertheless, the deal has
limited immediate impact on the sovereign's overall debt level. Fitch maintains
its view that debt to GDP will peak in 2013-2014 at about 120% of GDP and then
fall gradually. So although a deal was not factored into our baseline projection
and is a positive surprise, it does not affect Ireland's public debt dynamics
sufficiently to change our ratings assessment in the short run.
However, by extending the average duration of the sovereign's total debt stock
(by approximately three years, to above 10 years), Ireland will have one of the
highest average maturity profiles among Fitch-rated sovereigns.
The Irish authorities said on Thursday that the Irish Government and the
European Central Bank had agreed to replace the promissory notes with long-term
government bonds, with maturities ranging from 25 to 40 years. Irish Bank
Resolution Corporation Limited, the asset recovery bank created by the merger of
Anglo Irish Bank and Irish Nationwide in 2011, was liquidated.
We revised the Outlook on Ireland's 'BBB+' rating to Stable from Negative in
November last year, citing progress in fiscal consolidation, external adjustment
and economic recovery, and improved financing options. The risks to Ireland's
credit profile that we noted at the time still apply. These include the need for
significant further adjustment, the weak growth outlook, and continuing
vulnerabilities in the financial sector.
(Caryn Trokie, New York Ratings Unit)