* Moody's upgrades Irish debt to Baa3 from Ba1
* Cites economy's growth potential, restored market access
* Return to investment grade to usher in fresh debt demand
By Padraic Halpin
DUBLIN, Jan 17 Moody's Investors Service
upgraded Ireland to investment grade on Friday, handing the
government a major post-bailout boost and opening its already
sought-after debt to investors prohibited from buying junk-rated
It is the latest in a run of good news for Ireland, which
became the first euro zone country to complete a bailout, made a
storming bond market return last week and has an economy that is
picking up steam.
Moody's, which was the only rating agency to class Irish
government debt as "junk", raised it to Baa3 from Ba1 with a
positive outlook, citing the economy's growth potential and
restored market access as the main drivers.
"They undertook the fiscal consolidation and structural
reforms in the (bailout) program with great seriousness. It
really was their determination to succeed that helped them to
both regain and retain investor confidence," Kristin Lindow,
Moody's analyst for Ireland, told Reuters.
"It shows that meeting and exceeding criteria is very
helpful for regaining market confidence."
Moody's, which nudged up its outlook on Ireland to stable
last September, downgraded the country's banks last month and
said on Friday that a cleanup of non-performing loans that is
still in the early stages would likely impair profitability.
However, Lindow said Moody's does not expect the government
will have to provide much if any additional capital to the
banking system following an upcoming European stress test.
The upgrade comes as the economy shows signs of bettering
two years of scant growth, with house prices on the rise, the
jobless rate falling to 12.5 percent from a 2012 peak of 15.1
percent and GDP growth of 2 percent expected this year.
Despite having a debt and budget deficit among the highest
in Europe, Ireland has kept investors on its side by
consistently hitting fiscal targets and has largely brushed
aside Moody's negative stance since resuming borrowing two years
At the height of the euro zone crisis in July 2011, Moody's
cut Ireland's rating to Ba1, one notch below former financial
market pariah Colombia, and that prohibited large, mainly
Asian-based ratings-sensitive funds from touching Irish debt.
Restoring it to investment grade allows some sovereign
wealth funds and Asian central banks to rejoin the scramble for
Irish paper where yields on 10-year debt have fallen below 3.5
percent from a mid-2011 high of 15 percent.
With such funds able to place orders in blocks of some 300
million to 500 million euros at a time, their return would have
a big impact at auctions set to resume at a modest pace this
year when 500 million to 1 billion euros are likely to be
"This is a better-than-expected result for Ireland, to get
the outlook changed to positive is an added bonus," said Ryan
McGrath, a bond dealer at Cantor Fitzgerald.
"What it means on Monday morning is that yields are going to
trade lower. Yields have come incredibly far, but I think there
is room to tighten further versus the core. What it does in the
year going forward is it opens up a new investor base."
Market participants see ratings momentum moving Irish debt
further away from fellow peripheral countries such as Spain and
Italy, and towards France and Belgium, sometimes described as
members of the euro zone's "soft core".
The head of Ireland's debt agency, John Corrigan, said in a
statement that the shift in outlook gave a positive context for
future rating reviews.
Fitch, which rates Irish debt three notches above junk
status at BBB+ with a stable outlook, is next in line to give an
update in a month's time. S&P lifted the outlook on its BBB+
rating to positive last year and will review it again in June.
New EU rules require credit agencies that operate in Europe
to lay out the dates on which they review a country's rating.
S&P decided against downgrading Portugal's credit rating
earlier on Friday and removed it from Creditwatch negative,
while Fitch affirmed Netherlands at AAA, keeping its outlook at
"Today's upgrade will have benefits for the economy as a
whole by putting downward pressure on the price of credit for
companies and organisations who are reliant on the markets for
funding," finance minister Michael Noonan said in a statement.