Ireland upgraded to investment grade (+) by Moody’s Irish

On Friday evening after US close Moody’s finally upgraded the Irish sovereign rating by one notch to Baa3 (investment grade) from Ba1 (non-investment grade). Furthermore, Moody’s put Ireland on positive outlook.

The motivation behind the upgrade is two-fold. To quote Moody’s: “1) the growth potential of the Irish economy, which together with ongoing fiscal consolidation is expected to bring government debt ratios down from their recent peak; 2) The Irish government's exit from its EU/IMF support programme on schedule, with improved solvency and restored market access.”

It is not our impression that the rating upgrade was consensus expectation in the market. A Bloomberg survey conducted last week showed that 9 out of 10 analysts did not expect an upgrade, see FT. On Thursday 16 January we recommended going long Ireland in anticipation of a rating upgrade of Ireland in H1.

In hindsight, the rating upgrade should maybe not come as such a surprise. On 19 December Irish GDP data was released and with a Q3 print of 1.5% q/q and an upward revision of Q2 the hard data constituted confirmation that Irish growth has accelerated. The data release prompted Moody’s to lift its 2014 GDP forecast on Ireland to 2.8% in a credit opinion that was released on 22 December. Note, though, that a rating upgrade of a sovereign that is on stable outlook is not that common.

While a rating move has often limited market impact, we do expect Irish bonds to get some tailwind at the open Monday. The non-investment grade from Moody’s has prevented some investors from entering Ireland. Going forward, we in particular expect increased interest from official money resulting in a broader investor base.

Despite Moody’s hesitation, the Irish recovery has been well accepted and understood in the market, which currently is pricing Irish sovereign bonds as BBB+ (or better). This is also the current rating from both S&P and Fitch (that is two notches higher than Moody’s).

Moody’s positive outlook indicates that we could see more upgrades of Ireland this year. An upgrade could come if ”1) the government continues to comply with its fiscal consolidation targets; and 2) the economy grows rapidly enough to place government debt metrics on a firm downward path... Continued stabilisation in the banking system in the run-up to and aftermath of the ECB's asset quality review would also prompt upward pressure.” The next reporting date is 16 May.

Growth has accelerated, Ireland is set to achieve a primary surplus in 2014, government debt has peaked and the large cash buffer at the NTMA implies that Ireland is prefunded to 2015. The Irish government has so far delivered all the fiscal belt-tightening required by the Troika programme. In short, another upgrade this year seems likely.