S&P Global Ratings soothes over Brexit risk for Ireland

Moritz Kraemer, the chief sovereign rating officer at S&P Global Ratings, has played down the risks facing Ireland if the UK were to vote in less than a month to exit the EU.

In an interview with the Irish Examiner, Mr Kraemer said S&P Global Ratings has a very positive outlook on the Irish economy, though growth rates will likely slow.

S&P is scheduled to next review Ireland’s credit rating on June 3, just 20 days before the UK votes on its future in the EU.

Q. How would you describe the recent years for Ireland?

MK: “It’s been a roller coaster as well you know. We’ve held through the financial crisis the view the fundamentals of Ireland are strong and that was reflected in us keeping a strong investment grade rating when Ireland was shunned by the capital markets.

“We thought that view was a gross overreaction of investors because of the underlying strength of the Irish economy. We considered (the economy) to be dented by the banking crisis but not comparable to other sovereigns.

“One of the key strengths that helped Ireland through the crisis relatively better than others was its flexibility and openness which allowed the economy to climb out of the hole much more quickly than we have seen in countries like Portugal or Spain.

“That is what we expected and that is what happened. Flexibility is a strength. Openness is a strength. The business environment is structured to investment and that is a good news item.

"Obviously, now we are looking at a different public debt burden than before the crisis, so that is much more a mark on the file on the negative side. But we are constructive on Ireland.”

Q. Apart from the gross debt, any other negative aspects?

“Ireland was an AAA rating before the crisis. We take some comfort from the fact we did not lower the rating as much as others have had. It is now at an A+ level, which is pretty good really. Debt is only a problem in as far as you can’t grow out of it. Now, we think that Ireland compared to other economies has much better prospects of growing out of it (the debt burden) because of the flexibility that I described.

“We are seeing over the last three years or so that the debt ratio is coming down. We have a stable outlook on the rating and I think this balances the upside/downside risk.”

Q. How long will it take to get the AAA back?

“That is a tricky one. We need not only to look at the debt of the Government, which is coming down, but the debt of the overall economy— the private sector is pretty leveraged as well.”

“In Europe we are seeing a half decent recovery - it is nothing stellar. Ireland is clearly (growing) faster than the rest. We see in those economies growth is going to slow down and we see that for Ireland as well.

"A 3% growth rate next year and for the years beyond would be a pretty good outcome. The trajectory has been up. There have been three upgrades. That may continue but it is going to take time.”

Q. No track record for a country returning to AAA swiftly?

“There has never been a case in the sovereign-ratings history when (as in the Irish example) a rating went down that much and went up that much, back to AAA. The crisis has really exposed some of the downsides of being small and open.

"If you are a small and open (economy), you are going to be hit more than if you are big and closed. This is something we all learnt in the crisis. If you want to offset that you need a very strong balance sheet, which Ireland had before the crisis.

"What helps Ireland of course is that it has assets which Nama holds and which it is selling off. That is helpful.”

Q. So, very strong growth in the last few years, but because of the history of sovereign ratings don’t expect to get back to a AAA grade any time soon?

“We also need to understand that the group of AAA countries is becoming smaller worldwide. (The UK could lose its AAA after June 23 as well.) The overall global environment of growth is slowing.

"We have a demographic shift. Productivity has slowed down. Investment has slowed down. There are a few headwinds which make it harder (to secure or retain a top AAA rating.)”

“Looking at the experience, in S&P Global Ratings history no A+ rated sovereign was ever upgraded to AAA in a five-year period.”

Q. Are there issues about a minority Government here following the February poll?

“Since the beginning of the crisis, every ruling coalition in the EU has lost elections apart from possibly one. It is a pan-European phenomenon. Which is why I think the European policy decision-making will be more difficult going forward because all the nations have experienced (some sort of) political cost.

"Minority governments have happened many times in many countries.”

“What is important to remind everyone is that actually the whole austerity issue is misplaced. In Europe, right now, there is no austerity. Most governments are running neutral to expansionary budgets.

"In Greece, yes, it is different. If you look at Italy, Spain, Portugal as well, we have an unemployment problem and we have in some countries large deficits. But it is not an austerity issue.”

Q. On the banks and financial system: Pressure is building on home loan rates. Any issues there?

“In general, in Europe, we have an environment where interest rates for governments, but also for the private sector, are unsustainably low. Much of the improvement in government deficits in many European countries is being caused by ultra-low interest rates which are not related to fiscal strength but is related to the ECB’s extraordinary easing that has led to negative interest rates in many cases.

“I think the interest rate burden can hardly be considered a key problem. If there are debtors struggling at the current interest rate then I think that they are over-exposed.”

Q. There is frustration here that eight years after this huge collapse about the amount of mortgage arrears and deals not struck with borrowers?

“In general terms, it is not specifically an Irish situation. Countries which did not have such a big banking crisis like Ireland have unresolved issues in many banks. We are still very much dependent on bank lending.”

Q. And what happens if the UK votes to leave June 23?

“If the British vote to Brexit on June 23, on June 24 things will still be the same. Britain is an important trading partner but it is not as important as it was when the two countries joined the EC in the early 1970s.

"The real weight of the UK in Irish exports is probably a little bit larger than the numbers suggest because most of the exports to Britain, I would expect, are from Irish indigenous companies, while most of what is going to the US may be distorted by transfer pricing and other issues.

"The trade channel is the one to watch here. We will probably have still free trade for a some length of time.

“Even if the UK were to detach itself entirely, there would still be the World Trade Organisation. Merchandise exports across the Irish Sea, I don’t think would be much affected.

"What is much more critical on the agenda, is that it is not clear, if the UK leaves, where they are going to, and where they will end up. It is a process which for a number of reasons will take many years to resolve because they will have to find a new treaty, which all the other members can also agree to and in some cases, like Ireland, probably also through a referendum.

"This may take many years. One of the least contentious issues is free trade. What is much more contentious is the free movement of labour, and I don’t think it would be possible for the UK to negotiate a special relationship with Ireland for example which says that the Irish can come and work here, no questions asked, but not the French or Latvians. That is not going to fly.

“So, Ireland would be in exactly the same situation as the rest of the EU. FDI has been important in Britain for also financing the current account deficit which is rather large. think that is going to be a risk.

"Some speculate that Ireland could benefit because some investment flows might be redirected towards Ireland, and that is probably going to happen. But whether (the volume) is going to be very big or not, I don’t know.

"Also, there is a question whether that would be a good thing for Ireland because it is a small economy prone to overheating. If you have a reasonably large part of the investment that would have gone to the UK going to Ireland then I think you might get a problem of balance in the economy.

"So the whole process of finding a new relationship between the UK and Ireland and the EU will take many years and there may be a slowdown in Britain, and there may be a depreciation of sterling which would be bad for Irish trade, but it is nothing that didn’t happen in 2007 and 2008.

"I don’t think it will be a big change in the coming years. It will be fairly slow. And the outcome might be remarkably similar to what we have now.

“Any solution that they find will probably have to be put to the British population in another referendum.”

“It is a long way down the road. So, it is not likely to impact the Irish rating in the midterm. I do not think it is our expectation that a Brexit vote per se would change things so much in the second half of this year that the Irish economy would be negatively impacted.

"It may be many months before the UK would be able to put a bargaining position to the EU partners. I would be surprised to see things move so quickly that we would see a material impact on the Irish economy soon.

"The dependence on the UK is not as nearly as big as it used to be. There are special issues around the border, but I do not think they will impact overall.”

Q. In summary, you are quite upbeat about the Irish economy?

“Our action speaks louder than words. We have changed the rating by three notches within investment grade at a time when Ireland was not able to borrow in the capital markets.

"It suggests we were seeing through the haze of panic to the strengths of this economy to pick itself up. And that is what happened. We rated Ireland BBB+ when no one wanted to lend the Government any money. We thought the market was wrong.”

Q. What is the future for low corporation tax and Ireland?

“It is easy to overestimate the role of corporate tax but, of course, it matters. The business environment is probably more important. It is clear that the low tax rate is unpopular in some quarters in continental Europe and there would be many politicians that would be happy if it were to go.

“It did survive when Ireland was a ‘programme country’ when Ireland could have more or less been dictated to. It didn’t happen and I find it unlikely that pressure would reach a level that would antagonise the Irish to a degree that they may become more wary about EU membership.

"Given what is going on in the neighbouring isle, I would expect the EU has enough issues to deal with right now and not want to open that can of worms. Ireland has been used as an example as the best way to get out of the crisis.

“Do they want to antagonise the best pupil? There are so many things for the Commission to deal with. Even if they (UK) stay in, this is not over. You have still Greece out there. You have the refugee crisis out there.

"I don’t think there is the appetite to create yet another front line with one of the member countries you want to keep on your side. You might have more regulation coming (down the line)over transfer pricing but taxes in the strict sense is a subject that the EU has stayed clear of.”

“We expect the ‘Remains’ will win the day, but if ‘Brexit’ were to win it is not going to be a violent divorce. It is going to be a slow and civilised process that will not change too much in the near term.

“If Brexit were to win the UK rating would likely go down. We have been categorical on that one. But that doesn’t mean that Ireland, just because it is a neighbour, would have the same fate. The linkages with the UK are not what they once were.”

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