DBRS Places Ireland’s AA Ratings Under Review with Negative Implications

DBRS has today placed the Republic of Ireland’s AA Long-Term Local Currency and Long-Term Foreign Currency ratings Under Review with Negative Implications as a result of larger-than-expected bank recapitalization costs and resulting pressures on public finances. DBRS will wait for Ireland’s Ministry of Finance to announce a four-year fiscal consolidation plan in early November and the 2011 Budget in December to determine the extent of the erosion of the credit, but notes that the probability of a downgrade has significantly increased since our last review due to a higher debt burden. However, a fiscal plan that is decisive, clear and politically supported is likely to maintain Ireland’s ratings in the AA range.

Ireland’s structural strengths and strong policy response to the financial crisis continue to support the overall rating profile. The government has taken extraordinary steps to put public finances on a sustainable path, increasing taxes and cutting spending by EUR8 billion (5.0% of GDP) in 2009 and EUR4 billion (2.5%) in 2010. Taxation receipts and expenditures in 2010, not including bank recapitalizations, are broadly in line to meet the targets set out by the Ministry of Finance in December 2009. DBRS also takes comfort in Ireland’s long-term growth prospects, due to its young and skilled workforce, flexible labor market and highly open economy. Furthermore, Ireland has a comfortable funding position, with Exchequer financing needs covered through June 2011 and approximately EUR25 billion (16% of GDP) held by the National Pension Reserve Fund.

However, the fiscal cost of recapitalizing Ireland’s banking system has significantly increased since our previous assessment in July 2010. The Central Bank announced on September 30 that up-front recapitalization costs of the financial sector are at least EUR45 billion (29% of GDP), up from the previous estimate of EUR33 billion. In a stress case scenario, the Central Bank noted recapitalizations could reach EUR50 billion.

Due to these recapitalizations, public debt levels will increase above previous estimates. The government now projects gross debt to reach 98.6% of GDP by the end of 2010, and to continue rising until 2012-13.

The government is expected to announce a detailed multi-year plan to reduce the deficit to 3% of GDP by 2014. Given the size of the deficit, the high debt burden and the contingent liabilities in the financial sector, a clear fiscal program backed by broad political support that restores confidence will be necessary to stabilize the ratings in the AA range.

Notes:
All figures are in euros unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on our website under Methodologies.