The Irish Economy

While of no real significance there have been statements today from both Fitch and Moody’s which merit at least a reading.

First out were Moody’s with their annual credit report.  The press release is here.  There is no ratings or outlook action with this report but in a phone interview with a company analyst it is reported that he said the company is monitoring its negative outlook on Ireland.  Moody’s also removed an explicit PSI warning. 

Today’s release was not going to change Ireland’s rating with Moody’s which is Ba1 (‘junk’ status) with negative outlook.  Paddy Power are offering a “novelty bet" on Ireland’s credit rating with Moody’s.  As recently as August the odds were 9/1 that there would be a ratings improvement by the end of the year.  In my opinion a ratings improvement from Moody’s remains unlikely but the odds on it are now in to even money.

This evening Fitch did announce a ratings action with the negative outlook on Irish sovereign bonds improved to stable.  Their statement is here.  Ireland is at BBB+ with Fitch, three notches above ‘junk’ status.  The revision of the outlook is because they judge “that the risks surrounding the adjustment path have narrowed and become more balanced”.

The statement also says that it is not their expectation that there will be “a substantial cut in the public debt through an EU agreement to share the burden on legacy costs of bank recapitalisation”.

The MTFS from the Department of Finance can be read here.

As linked to by Philip below, Ashoka Mody reignites debate on the default option.   His views must be taken seriously given his vast experience on economic crises.   But it is important to put his proposals in context.   They are largely aimed at European policy makers.   A large private/official-sector debt write off, followed by a commitment to provide necessary funding support as countries moved in a phased way to the low debt/balanced budget model common for states in the US, could well be a route out of the current crisis.

The problem is that this option is not on offer.   In these circumstances, the more a default option is kept on the table as a possible future choice, the harder it will be to regain creditworthiness.   Who would want to buy Irish bonds now if they stand a significant prospect of facing write-downs on their investments in the future?    To the extent that expectations of default remain high, the concern is that it would be less than the orderly/supported model described by Ashoka.   The evidence from past defaults is that they come with large output costs.   The fear of the crisis entering a new virulent phase would undermine confidence and growth in the present, making it harder to stabilise the vicious feedback loops between the banking, fiscal and real sectors. 

An implication is that it is important to move decisively in one direction or the other.   Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible.   With the first option not actually available, the Irish government have moved in the second direction – with reasonably good results in terms of the restoration of creditworthiness.    This option can only work with a strengthened institutional structure for EMU – Patrick Honohan’s euro 2.0.    A core component must be a strengthened lender of last resort for sovereigns backed by fiscal rules that limit risk and moral hazard.   The ECB’s OMT programme – however rationalised by the ECB itself – is an important step in this direction, but more needs to be done.

Princeton’s Ashoka Mody (former mission chief for Ireland at IMF) has an op-ed in the Irish Times – it is here.