Moody’s Downgrades Irish Sovereign Debt

Moody’s have downgraded Irish sovereign debt again, this time to Aa2 “blaming banking liabilities, weak growth prospects and a substantial increase in the debt to GDP ratio.”

The FT’s Alphaville people are inclined to blame it on Dan Boyle for his comments to the Sunday Tribune (reported internationally with an interesting headline by Reuters.) I think the FT people are pulling our legs a little attributing such importance to Dan. However, the comments did seem a little strange.

The bond market reaction has been fairly muted, with the ten year sovereign yield ticking up only a few points. However, yields at 5.5 percent are hardly satisfactory. If sustained over a long period, interest rates of this type would make it very difficult to stabilise the fiscal debt.

50 thoughts on “Moody’s Downgrades Irish Sovereign Debt”

  1. Neil Hume of the FT has added a comment to that Alpahville blog post, pointing out that on 10th May last, Moody’s released a 10-point summary document titled “Rating Governments Through Extraordinary Times” (link here if you have a Moody’s subscription: http://v3.moodys.com/page/downloadeventmaterial.aspx?path=/publication/events/material/2010/6/29/Rating%20Governments%20Through%20Extraordinary%20Times%20%e2%80%93%20A%2010-Point%20Summary.pdf)

    In that document, Moody’s stated in relation to Ireland: “No significant rating action is expected in the short run”….

    Then again, maybe a one-notch downgrade isn’t all that significant, not when it keeps pace with other agencies and sees the outlook shift from negative to stable.

  2. Brian Lenihan last Friday “I am confident that the cost of saving Anglo Irish and Irish Nationwide will be €23bn to €25bn and the taxpayer will not lose anything with AIB and Bank of Ireland.”

    http://www.independent.ie/business/irish/budget-to-focus-on-cuts-over-new-taxes-2262712.html

    Moody’s this morning “Overall, the recapitalization measures announced to date could reach almost EUR25 billion (equivalent to15.3% of Ireland’s 2009 GDP) — and Moody’s expects that Anglo Irish Bank may need further support.”

    Further support?

  3. Who is going to tell our masters in Brussels that we are no longer going to cut expenditure and raise taxes post 2011. I am intigrued that the state shareholding in AIB will stay around 70%…not sure about that now.

  4. If the deficit officially includes the money thrown away on Anglo and INBS, is the government still committed meeting the 3% target by 2014? Impossible I would have thought even based on the lower deficit projection.

    I still cannot get my head around official propaganda that writing off nearly €30bn in two dead institutions is a smart move.

  5. From the IT article:
    “While we do not expect the government – not even in a moderately stressed scenario — to incur permanent losses in excess of 25 per cent of the country’s 2009 GDP as a result of these obligations [NAMA and the banks], we believe that the uncertainty surrounding final losses would exert additional pressure on the government’s financial strength,”
    That’d be 40 bn euro…
    (working on 160bn 2009 GDP).

    We’ve already in a money losing position (mark-to-market) in BoI.

  6. @ Karl

    1. weighted maturity of Irish debt is more important than headline debt levels at the big round numbers. We dont really fund ourselves at 5.5% for 10yrs, we more accurately fund ourselves for around 7yrs at 4.75%. And even that aint true, because most of the debt was actually issued at a far lower cost, so its more like 7yrs at 4.25%. This is obviously going to move higher as we issue more debt at higher average levels, but the context is important to note. Greece isnt actually funding itself at 10%+, and in fact, its never going to fund itself at anywhere near those levels. It either goes bust or funds itself around 5-6% from the EU/IMF.

    2. Moodys may have downgraded us this morning, but they also raised the outlook to stable from negative. Hence that should be all the bad news on that front from them for 2010. As such, its a somewhat positive story (Irish 2yr yield actually lower now) – we already trade well south of Aa2 in the actual market, and we could easily have crept lower by another notch either today or in 3 months time. Thats now off the table (from Moodys). We are now stable with both Moodys and Fitch. As Meatloaf said, two out of three aint bad…

  7. 2009 Moodys downgrades Irish bonds because of Anglo, 2010 Moodys downgrades Irish bonds because of Anglo, 2011 Moodys downgrades Irish debt to Junk because of Anglo. With debt approaching 100% of GDP Anglo is already costing Ireland 3 bn in year in interest every year as it the major cause of 250 basis point bund spread. Now I know what Dan Boyle meant when he said Anglo was systemically important. Because we wouldnt let a bank fail we becasue we are part of the great EU the anglo guarantee has broken the solvency of the state and cost the poor taxpayer much more than the sum total of all EU grants we ever received.

  8. @Michael Finnegan

    On your last point Michael, I wonder if the country is retreating back to the sixties when the disparity in wages between the public service and private sector employment was very wide. I recall speaking to a chap I knew who had taken a job in UCD at the beginning of the sixties. It enabled him to buy a house in Rathmines for £3,500 – a big house. Is the Moodys downgrade coupled with the IMF report an acknowledgment of something SMEs have been saying for over a year – a prolonged deflation is inevitable – but government has been denying?

  9. How sure can we be that these changes of opinion on the part of this rating agency are not just a reflection of its inconstant temperament, as its name suggests?

  10. If the FT people really wanted to pull our legs, they’d blame the ESRI for letting “the markets” in on the big secret about the promissory notes and the deficit.

  11. @Eoin,

    Your attempts at restoring some balance are always welcome. They counter the Private Fraser mentality (Doomed, we’re all doomed) that sometimes takes hold. However, I’m just wondering how long the ratings agencies’ sanguinity (and the market’s moderate opinion) will hold in the context of the current ‘patchy’ deflation in the economy? It’s ‘patchy’ in that prices in the state, semi-state and some sheltered sectors remain high (rewarding inefficiency and rent-gouging – not to mention the impact of NAMA in the property sector) while those in the more exposed sectors continue to fall (probably reflecting an attempt to keep afloat by covering variable costs and making some contribution to fixed costs).

    The expectation has to be of further deflation – even if it remains patchy – and this will keep real interest rates high, choke off demand and retard recovery.

  12. While any changes have probably been built into current market pricing given the information available prior to the announcement – the downgrade announcement not being a huge suprise – it does highlight the importance of unelected politicians realising that their utterances can spook a market and that this should go into the think before talk out loud box!

  13. RTE commentator remarked that “on the bright side the outlook has improved from negative to stable”. I think there is a misunderstanding here. It is not the outlook for the economy, it is the outlook for the rating. Obviously that would improve immediately after a downgrade, it dosen’t mean anything.

    @Ribbit lol, but seriously why do we still “rate” these rating agencies after their complete incompetence in the recent crisis?

  14. For info.

    the results of the 2nd tranche of loan transfers has been announced
    AIB 1st tranche was 43% 2nd at 49%
    BOI 35% to 38%
    Others 46% to 72%
    Total 47% to 48%

    I suppose the NAMA business plan will change again as will the critique of the business plan.

  15. @ Tull

    INBS at 72% is a truly astounding discount. I mean, how bad do the lending practices have to be to hit that on an “average” basis?

  16. @ Brian Woods

    “RTE commentator remarked that “on the bright side the outlook has improved from negative to stable”. I think there is a misunderstanding here. It is not the outlook for the economy, it is the outlook for the rating. Obviously that would improve immediately after a downgrade, it dosen’t mean anything.”

    Isn’t RTÉ’s job to give the impression that everything is is calm and there is no need to panic ? Same as for the rest of the MSM. Everything will be fine even if the bond spreads say otherwise.

  17. @ Tull

    I have already updated Karl’s spreadsheet projection, using these second tranche haircuts as best estimate for what follows and it reduces the NAMA bill from his prediction of 41.7bn to 38.9bn. I wonder will Gene Kerrigan have a cartoon next Sunday with the bad bank gleefully seeing a 3bn windfall?

  18. @BWII
    “seriously why do we still “rate” these rating agencies after their complete incompetence in the recent crisis?”
    Because they are still systemic – the ECB has ratings from the three main rating’s agencies enshrined in its valuation method. Absent another mechanism, we are stuck with them.

    Why have the existing failed ratings’ agencies not been replaced by a more robust method of rating debt might be a better question, but that pre-supposes that Central Banks, insurance companies, pension funds et al are unhappy with how the ratings’ agencies are operating.

  19. The downgrade had nothing to do with Dan Boyle, or inferred lack of commitment to further austerity measures. It had everything to with the weakness of government finances, as highlighted by the increasing unaffordability of government debt.

    “Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength, as reflected by its deteriorating debt affordability”, according to Moody’s lead analyst for this economy.
    http://www.irishtimes.com/newspaper/breaking/2010/0719/breaking7.html

    This is despite the fact that the whole thrust of policy was supposed to strengthen govt. finances. They are instead weakening because debt is increasing (from depressed taxes, to higher debt interest payments, to repeated bailouts), and because the revenue stream to support that debt, nominal GNP is plunging.

    Of all the foolhardy policies advocated and adopted, the fostering of deflationary trends in the economy is one of the worst since it increases the real debt burden for all net debtors, not just in the private sector by the public sector also.

    ESRI forecasts effectively no growth in nominal GNP over the next two years, while the deficits and interest payments balloon (to say nothing of further bailouts). As a result, using ESRI forecasts, general government debt will have risen from 52% of GNP in 2008 to 115% of GNP by 2011.

    No wonder l/term rates are nearly 3% higher than in Germany. They are also nearly 1% higher than Spain. Unless nominal GNP can grow over a 6% rate on a sustained basis, debt-servicing will consume an ever greater part of national output. This is not sustainable.

    There is a way out of this impasse. Fitzgerald and Morgenroth in their Mid-Term Evaluation of the NDP (2003) estimated that the return on NDP-style investments varied bewtween 14% & 18%. http://www.progressive-economy.ie/2010/07/moodys-downgrades-investment-upgrade.html

    Borrowing at 5.5% and investing for 14% return or above would actually close the deficit and bring interest rates down, unlike current policy.

  20. Does anyone know if the cash collateral element of derivatives for state-guaranteed banks depends on the highest rating of the state or a combination of different ratings?

    Could we see more cash collateral calls on the banks as a result of the downgrade of the state?

  21. @BWII

    “it reduces the NAMA bill from his prediction of 41.7bn to 38.9bn.” That of course excludes Anglo which was estimated to have €8bn in t2 and the t1 haircut was 55% and if those two components turn out as estimated, and if you apply the cumulative T1 + T2 discounts to the total estimated transfer then it would be €40.7bn.

    The press release today from NAMA is here

    http://www.nama.ie/Publications/2010/NAMATranche2LoansTransfer.pdf

    It is even sparser than the information it gave for t1 – no LEVs or CMVs or update to the costs to be recharged for enforcement and due diligence. Given the decline in the Irish commercial and residential markets since last Nov and even if 1/3rd of NAMA assets are in the better performing UK I calculate that NAMA are overpaying for these loans by €1-2bn and I think there’s a strong case for the EU to examine the level of State-aid being paid via over-valued loans.

    Also in light of the severe haircut for INBS today, will the Financial Regulator force INBS to re-plan its capital requirements and if it does by reference to today’s haircut, how much more than €2.7bn will we need shell out to recap INBS?

  22. @BWII

    Will NAMA profit forecasts be upgraded?

    Will there be a thread with 227 posts arguing this back and forth?

    As Mick Bailey allegedly said “will there like (redacted)”

  23. 72% discount!

    including the LTEV uplift?

    mon dieu!

    I mean, that’s some quality banking right there

    you’d probably recover a higher % if you gave the money to a wallet inspector

  24. We are Aa2 on stable outlook. We are not exactly hurtling towards junk bond status. People just need to calm down. A rating action is not exactly front page news. The Market knew it was coming. Everyone knew this was coming. Nothing has changed.

  25. @ The Alchemist

    The tepid recovery in the US and the expectation that pre-crisis employment levels may not be reached again until at least 2015, along with Europe’s problems, points to slow growth in Ireland.

    On Wednesday morning, the ESRI will publish an update of their 2009 recovery scenarios.

    It’s clear that collective power provides dividends from the political process e.g benchmarking and the IFA’s land for roadbuilding bonanza.

    Public sector pensioner numbers have jumped by 31,000 or 43% to 103,400 since 2005 and the bill has increased from €1.35bn in 2005 to €2.23bn.

    In the US shares had their worst decade since the 1820s and this decade is expected to be a poor one for private pension funds at home; there was a loss in real terms in the past decade..

    The private sector will continue to shoulder the biggest adjustment during the recovery.

    There will be no public sector reform.

  26. @christy

    Taking into consideration that farmland – not development land – was fetching handily between €20-€30k per acre, even though it could only return around €140.00 per acre (as Michael Hennigan pointed out a some of this investment money came from outlandishly overpriced CPO valuations), I am amazed that the discounts are so low across the sector. It may transpire that assets bought for €100 million will end up back on the block (and back in the hands of the same developers) for as little as €5 million. Who was it that said in times of depression assets return to their rightful owners? Every morning I pass by a small crib-sized shop that was sold for €1 million in 2005 and is now empty and put back on the market by the lending bank inviting opening offers around €375,000 and dropping.

    Sorry to be so anecdotal amidst the theoretical and quantitative analyzes but there is a certain roughed reality about parochial facts with which every theory has to contend.

  27. @The Alchemist

    a prolonged deflation is inevitable

    This is incorrect. The period of deflation in the Irish economy is nearing an end.

    It has allready ended for manufacturing output, agricultural output, export and import prices, all of which are now showing y-on-y increases. The manufacturing output prices figures for May were published last Thurday and showed a 2pc y-on-y increase. For most of 2009, this index was showing decreases. The agricultural output prices figures for April were published at the start of this month and showed a hefty 3.9pc y-on-y increase, but, significantly, a 10.6pc increase (seasonally-adjusted) since their lowpoint last August. Both these trends will accelerate in coming months as the effect of the fall in the value of the euro since the start of 2010 works its way through the system. If the euro remains at its present level , both these indices will be showing quite large y-on-y increases in the final months of this year. The increases should also be reflected in consumer prices in the final months of this year.

    With regard to wages, IBEC published a report today (the one Michael Hennigan takes exception to above). In it, they show how there has been a dramatic improvement in wage competitiveness in Ireland since 2007. The gist of what they say is that wages in Ireland are now highly competitive and have no need to fall any further. I think we can take it that, if IBEC say wages in Ireland are now competitive, then they are.

    In keeping with the best traditions of economists who say ‘on the one hand…, but on the other hand…’ (no wonder President Reagan asked for a one-armed economist), I must add a caveat as insurance against being proved wrong. Were the euro to rise back up to and beyond its peak levels of late 2009 against both the dollar and sterling (which, obviously, no one here can predict), then, what I said above about deflation would still hold true, but would be delayed by six months to a year.

  28. @ jto

    I thought the one handed economist president was Harry Truman.

    On the other hand maybe your right !

  29. According to Karl Whelan, one of the reasons Moody’s cite for their move is ‘weak growth prospects’ for Ireland.

    If anyone has read my posts on here, they’ll know that I totally disagree with this view. But, as I have no wish to bore everyone to death, I won’t repeat any of my arguments here. Let’s ignore my view on Ireland’s growth prospects, and look at the Dept of Finance’s view, and the Central Bank’s, and ESRI’s.

    in April 2009, at the time of the emergency budget, the Dept of Finance forecast that GDP (repeat: GDP, not GNP, but GDP) in Ireland would FALL by 3pc in 2010

    by July 2010, the Dept of Finance had revised this forecast to one where they predicted that GDP (repeat: GDP, not GNP, but GDP) would RISE by 1pc in 2010

    So, they have revised their forecast by 4pc upwards in little more than a year.

    Central Bank and ESRI forecasts have followed an identical pattern.

    My own forecast is that GDP growth in Ireland in 2010 will be much higher than even the latest upwardly-revised official forecasts. But, as I say, lets’s ignore my forecast, and just concentrate on these official forecasts.

    Clearly the official forecasts published in Ireland in 2009 for GDP growth in 2010 were massive under-estimates (as I said at the time on here, but I won’t say ‘I told you so’ because I hate people who say ‘I told you so’). If my forecast for GDP growth in 2010 proves correct, the under-estimation in official forecasts could be as much as 6pc to 7pc. But, even if we ignore my forecast, and just take the official ones, on the basis of their revisions so far, and assuming no further upward revisions (very unlikely in my opinion), for most of 2009 they were under-estimating GDP growth in Ireland in 2010 by 4pc. By any standards, this is massively inaccurate forecasting. It can not be explained by the global economy recovering faster than was forecast in April 2009, because it hasn’t.

    Can any economist quantify how much this incompetent forecasting has cost the Irish economy in extra borrowing costs? Let no one say it is not relevant to borrowing costs because, as Karl Whelan quotes above, Moody’s are saying that growth prospects are indeed a factor.

    also note (especially hoganmahew):

    As hoganmahew is bound to post in reply that the first estimate for the fall in GDP in 2009 of 7.1pc was later revised to 7.6pc, I should also add that this is still a lot less than what the Dept of Finance, the Central Bank and ESRI were forecasting in April 2009 for GDP growth in 2009. At the time (April 2009) when they were all forecasting a FALL in GDP of 3pc in 2010, they were also forecasting that the fall in GDP in 2009 would be 10pc. So, the cumulative error over the 2-year period 2009 and 2010 is even greater than what I gave above for 2010 only.

  30. @Frank Quinn

    I expect it became such a popular joke that they all said it at one time or another.

    Reagan also said that the government should also employ only schizophrenics as economists, as they’d give the same range of opinions, but at half the cost. Very tasteless, I know.

  31. @JohntheO
    “The period of deflation in the Irish economy is nearing an end.

    It has allready ended for manufacturing output, agricultural output, export and import prices, all of which are now showing y-on-y increases.”
    Where do you get your export price data from? I can see wholesale prices for manufacturing, both for home and export consumption (CSO wpi series) are rising, but the only figures for services I can see are the Q1 sppi series which shows a decline of 4%. As services made up 17 bn of the 37 bn in exports in Q1, I think it’s important.

    Looking at the value numbers from the CSO extrade series, whether absolute or seasonally adjusted, exports are down YoY, while imports are up, but that is the April figure, compared with May for wpi. What does this do to your BOP forecasts? (imports rising faster than exports).

  32. @jto – well its good to have your other hand optimism back.

    My own personal favourite economist joke.

    A mathematician, an accountant and an economist apply for the same job.

    The interviewer calls in the mathematician and asks “What do two plus two equal?” The mathematician replies “Four.” The interviewer asks “Four, exactly?” The mathematician looks at the interviewer incredulously and says “Yes, four, exactly.”

    Then the interviewer calls in the accountant and asks the same question “What do two plus two equal?” The accountant says “On average, four – give or take ten percent, but on average, four.”

    Then the interviewer calls in the economist and poses the same question “What do two plus two equal?” The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, “What do you want it to equal”?

  33. @JohntheO
    I believe they were forecasting a decline in GDP of 8% for 2009, not 10%. But it is true, they are a bunch of incompetents. On the other hand, government revenue has come in consistently below forecasts, so I don’t see it has cost much.

    By the way, do you use constant prices or current market prices for your calculations? One thing I think the DoF have done which has skewed their figures is underestimate price deflation. Constant market prices have been boosted by this, I believe? (Or have I got it backwards again?). On the other hand, in current market prices (which is the GDP figure the government uses when calculating the debt/GDP ratio…) GDP fell 11.3% in 2009.

    You can see the scope for confusion, I hope? This is why I am reluctant to accept percentage changes as a basis for, well, anything really. I’d like people to give absolute numbers if they are going to claim to be ‘right’ or ‘wrong’ or even forecasting for the ‘n’giggles.

  34. Not being an economist i don’t understand how gaps in wages and pensions between the public and private sectors is good for ‘real’ economic growth. At the moment it seems the circle will be squared when the private sector catches up in employment but that doesn’t fit wth the IMF forecast for weak growth.

    It may be a limitation of my understanding but I find IBEC reports to my eyes are not politically neutral. When will year-on-year increases in turnover is any of the sectors you mention make a dent in unemployment. I have a problem squaring up the constructs with what I see. Is agri-employment falling or rising? With the end of the Tiger, one expected it to rise but is it?

  35. Did you see the comment in today’s IT on this? Sounds like there’s nothing to panic about. Steady as she goes. Move along there now, nothing to see here.

  36. A couple of quick questions from long distance,

    …can anyone inform as to what type of macroeconomic modeling tool (and methodology) the DoF utilize (?) ,… any indication on the baseline assumptions for projections and do they run scenario-based planning simulations (?) …and are these efforts (and results) aligned in any way to the strategic national development planning process / public investment programming agenda (?) ….and does any of this information/data (eventually) feed-back-in, to a medium-term macro-fiscal (type) framework that might aid policy-based decision making (?)…

    ……with all this talk in the IMF Art. IV of an indicative medium-term budgetary planning framework to support the efficient allocation of resources(?) …I was just pondering on the technical and analytical capacity within the DoF.

    Thanks, EMQ.

  37. Good Irish auction this morning in terms of demand.

    *IRISH 2016 BOND YIELDS 4.496%% VERSUS PREVIOUS 4.521%
    *IRISH 2016 BID-TO-COVER RATIO 3.6 VERSUS 3.1 TIMES IN JUNE
    *IRISH 2020 BOND YIELDS 5.537% VERSUS 4.688% AT PREVIOUS
    *IRISH 2020 BID-TO-COVER RATIO 3 VERSUS 3 TIMES IN APRIL

  38. @Eoin
    Good to get these away and the spread in the secondary market has come in significantly this morning.

    The 5.537% vs 4.688% is some increase in 3 months!

  39. @ DE

    yeah, nasty increase in yields alright, but getting the funding in is still the primary concern for 2010. 90% of 2010 issuance now done, and exchequer fully funded til Q2 2011, so wouldn’t at all be surprised if we see some govt guaranteed bank issuance in the next few weeks, and then maybe a large syndicated pre-funding of 2011 in Nov/Dec. Its been a little bit hairy out there so far this year for the NTMA, but overall they gotta be pretty pleased with the funding situation given the worse case scenario’s it could have been.

  40. They will be delighted to get it away considering there is a long line of funding desks in the the Irish banks waiting patiently to get deals away. Most urgent one I would imagine is Anglo.

  41. By the by, just a quick note on Irish government debt costs – the headline rate of 5.5% like on today’s issuance is not the problem in and of itself. In fact, the 10yr yield for Irish government debt over the last decade has been 4.527%, and was almost 5% from 2000-2004, so we’re not in truly bizarre territory. They key differences then vs now are obviously (a) the amount of debt we have outstanding but more importantly (b) the general levels of inflation and economic growth etc, which give us the “real” rate of interest on Irish debt. Conquering the deflation and recessionary dynamics will from next year (ie after we have stopped cutting expenditure) become the most important issues as to whether a 5% or so yield is sustainable or not. If JtO’s observations/predictions are correct on both growth and inflation then we should see strong improvements on our ‘ability to pay’, which is, at the end of the day, the key determinant in the whole debt problem.

  42. Senator Boyle has given so further views on Anglo yesterday at the McGill summer school –

    http://www.independent.ie/business/irish/early-closure-of-anglo-could-cost-less-claims-boyle-2266005.html

    Green party officials have stated that these are personal views

    Recently there was an interesting piece in the FT – “Should business leaders speak freely?”

    http://www.ft.com/cms/s/0/44781ff4-8ea6-11df-8a67-00144feab49a.html

    which expands on the view that life is on the record for politicians all the time. Is the personal and the party one and the same or separate?

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