Moody’s Downgrades Irish Sovereign Debt

The decsion was likely made last Friday.

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?

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.

@ 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…

@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?

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?

The political will to run out how long in advance of the next election?

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!

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.

@ 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.

@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.

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.

@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?

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

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.

@ Gavin

+1

@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.

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.

@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).

@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.

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.

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

@ 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.

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.