Moody’s Investors Service warns of home-grown risks to economic recovery

Ratings agency Moody’s Investors Service said it will closely watch the next government’s spending plans and monitor private sector pay amid fears the bounty of the hard-won recovery could be wasted by unwise actions and frailties at home.

Moody’s, which during the crisis was the most downbeat of the four main ratings firms on Ireland’s prospects, appears to downplay the potential of economic threats from abroad and instead warns of home-grown risks, if a new government after the election and the private sector were to over-inflate the economy once again.

Yesterday, Moody’s repeated its warnings about the country’s still-high debts, but also signalled out the high-level of soured loans resting on the banks’ loan books.

Just weeks after governor Philip Lane started his new job at the Central Bank, Moody’s calls for a “further improving of the resilience of the banking sector” and seeks “in particular, accelerating the resolution of the very high level of non-performing loans”.

It says 19% of the banks’ loans are non-performing.

Experts say such a high level of soured loans, almost eight years since the onset of the crisis, will likely play a significant role in striking a valuation for AIB, as the Government eyes to sell an initial stake in the lender in early next year.

Moody’s downgraded Irish Government bonds to junk during the crisis and relented comparatively late after growth started to surge.

It currently has a positive outlook on the Government’s bond debt paper, which suggests it is more likely to upgrade than to downgrade its existing lowly rating of Baa1, when it next assesses such matters.

Yesterday’s bulletin was its first since the publication of opinion polls suggesting Fine Gael has the support of 30% of voters and comes after the CSO released third-quarter growth figures last week, which pointed to an economy, in GDP terms, surging by 7% this year.

Moody’s forecasts the economy will grow 4% in 2016, but says the country’s current debt level of 97.4% of GDP, though down from a 2012 peak of over 120% of GDP, remains a “burden”.

Helped by investments from overseas, it assesses the country’s “external vulnerabilities” as low.

It warns however its rating could be downgraded if “the next government were to pursue a materially different fiscal policy, putting at risk the downward trend in the debt ratio”.

And it will “also closely follow developments in the real economy, such as wage and credit growth, to monitor the risks of a return to the ultimately unsustainable growth profile in the years before the financial crisis”.