Ireland: Moody's likely to upgrade Ireland to ‘A-level' Friday

We expect Moody’s to upgrade Ireland to ‘A-level’ (A3) or at least put the country on positive outlook on Friday. The move will come on the back of (1) continued outperformance of fiscal targets, and (2) Ireland’s two biggest banks having regained profitability. These are among the key determinants for a rating move by Moody’s. Moody’s is the only rating agency that still has Ireland below ‘A-level’ and an upgrade would bring it into line with both Fitch and S&P.

An additional supportive factor for an upgrade worth mentioning is that Ireland’s growth has accelerated this year. We forecast GDP growth of 4.0% for 2014. Ireland’s debt is on a downward trajectory. In a positive scenario, gross debt could fall below 100% of GDP already in 2016. Note that the net government debt is already at 92% of GDP – this is at par with Belgium. The latest ECB move is also considered a ‘credit positive’ factor by Moody’s.

Fiscal data ytd suggests that Ireland is set to beat its target for the fourth consecutive year with a deficit of around 4% of GDP. The Irish budget deficit was targeted to improve to 4.8% of GDP this year from 7.3% of GDP. There are signs of improvement in the Irish banking sector that has been a big concern. The H1 earnings results from AIB and BoI showed both banks surprising on the upside, reporting positive profits. The amount of non-performing loans continued to decrease in Q2, although the level remains high.

We would expect a lifting of the minimum rating to ‘A’ level to open the door for a group of investors that, due to rating, were prohibited from investing in Ireland. The Fitch upgrade in August gave a boost as most indices and a large group of investors require two A-ratings. However, some investors use the lowest rating from the three major rating agencies (which was also the IBOXX methodology up until 2008).

An upgrade should support continued convergence towards soft-cores. While the immediate market impact will be positive, it could take weeks before the full impact is priced in as it takes time, in particular for official money, to incorporate the changes. On the Irish curve, we favour the IRISH Apr-2020 and being long in the 10Y versus soft-cores. Furthermore, we recommend positioning for a flattening of the IRISH 5Y/10Y curve versus 5Y/10Y BGBs.