S&P upbeat despite Ireland downgrade

RATING agency Standard & Poor’s is upbeat about the future outlook for the Irish economy.

Despite cutting Ireland’s credit rating down a notch to A-/A-2 from A/A-1 the agency says the next government should broadly meet or surpass the 2014 general government primary surplus target of 1.9% of GDP.

Two thirds of the ambitious €15 billion in fiscal consolidation planned between 2011 and 2014 is scheduled to occur through expenditure cuts, it said.

It did not “see major risks to Ireland’s meeting the IMF targets because we see a broad political consensus behind the goal of stabilising the economy, the banks, and public finances, even if the path to such targets may be amended by successive governments,” it said.

The agency is maintaining its negative outlook on the country given ongoing concerns about bank funding.

The lower rating chimed with “our view of the uncertainties surrounding the size of Ireland’s additional capital needs for its largely state-owned financial sector”.

S&P said it would be able to reassess the rating by April when the Central Bank will have completed a review of the banks’ liquidity and capital requirements. It expects that Ireland will retain an investment-grade rating.

Frank Gill, an S&P analyst warned that if the labour market got worse “a rise in the level of delinquencies in the domestic banks’ mortgage books could result in higher new capital requirements than we presentlyassume”.

In a separate development S&P told Bloomberg yesterday the Government may be less willing to protect senior unsecured bondholders in the Irish banks.

While the agency’s view is that there is still a “fairly small prospect of senior secured unguaranteed bonds in rated institutions being forced into a coercive default,” there is “increased political acceptance for burden sharing with respect to senior unsecured unguaranteed bonds,” said the agency.

Alan McQuaid, chief economist, Bloxham Stockbrokers, warned the country could fail to meet its 2011 general budget deficit target of €15.2 billion or 9.4% of GDP. “We think the risks to the budget deficit target are to the upside rather than the downside, but it will be a close call as to whether further fiscal adjustment will be needed,” he said.

S&P added in its analysis that the Irish economy is nearing its cyclical low point, and that incomes “could well stabilise near current levels”. Furthermore unit labour costs have declined “markedly due to non-wage salary cuts, widespread labour shedding, and corresponding productivity gains”.