Standard & Poor’s has issued a pre-election warning that it could take a “negative rating action” on Ireland’s debt if the next government moves to rapidly cut tax or boost spending.
Any such move by the credit rating agency would have the potential to increase the cost of raising new national debt for Ireland, as the grade it assigns to sovereign bonds is a key pricing guide for investors.
In a note on Friday evening, S&P said it did not believe the next government would repudiate current fiscal targets. The agency said, however, that a departure from such targets could prompt action.
“We could lower the ratings if external events or policy shifts undermined growth prospects for the Irish economy, resulting in the weakening of public or private sector balance sheets,” said S&P.
“Moreover, if the Irish government were to embark on an overly expansionary fiscal policy after the election, or if the conditions for further privatisation were to become less favourable, resulting in Ireland’s public sector debt burden remaining at the current high level, we would consider a negative rating action.”
S&P ranks among two of the big three rating agencies to assign an A-grade on Irish debt, the other being Fitch. Their rival Moody’s does not assign an A-grade on Irish debt.
Irish debt has been trading at very low yields on the back of huge bond market interventions by the European Central Bank (ECB). However, borrowing costs rose after a new ECB plan to revive the euro zone fell short of investor expectations.
Fiscal targets
The yield on Irish 10-year debt was 0.99 per cent before the ECB unveiled the new plan on Thursday. The yield rose to 1.16 per cent on Thursday and closed at 1.19 per cent on Friday, having reached 1.25 per cent during the day.
S&P said Ireland’s policy and institutional effectiveness were supported by “consensus” among most of the main political parties in favour of sound public finances and economic flexibility.
“Although it remains unclear which government would take office after the general election in 2016, we do not believe it will deviate significantly from current fiscal targets and commitments,” it said.
S&P also indicated it is was comfortable with the direction of policy in Budget 2016. “We do not expect the government’s pre-election giveaways to derail its planned fiscal consolidation,” S&P said. “The expansionary measures announced so far are within our current base case, and the additional spending on healthcare should cover at least part of the recurring overruns in the sector.
“However, continued upward pressure on public sector wages and the further unwinding of emergency measures implemented during the financial crisis will weigh on future budgets.”
Windfall revenues
S&P expects that expenditure curbs under the fiscal rules will constrain Dublin’s use of windfall revenues if the economy continues to outperform forecasts. “We anticipate that fiscal consolidation will continue on the back of a strong economy, albeit slightly slower than the Government currently envisages.”
The agency said it could upgrade its rating on Ireland if the Government reaches a “sustained fiscal surplus” earlier than it expects or if the net general Government debt fell faster than projected.
