ECB debt deal gives Ireland glimmer of hope


Matthew Turner
Published on:

Agreement should be followed by a positive credit rating action.

Ireland’s debt deal with the ECB offers scope in reducing the country’s borrowing costs and alleviates the country’s high debt burden in the short to medium term, claim ECR experts.

The deal in effect wipes off the Irish exchequer around €3.1 billion of annual promissory note repayments, relating to the Irish Bank Resolution Corporation (IBRC). The promissory notes will be replaced by long-term government bonds, with maturities ranging from 27 to 40 years.

The liquidation of the IBRC allows the government to restructure the country’s bank bailout costs, making savings of approximately €20 billion to the exchequer.

Karl Whelan, professor of economics at UCD, explains in a report that the restructuring of Ireland’s debt “allows the repayments to be dealt with, at a time, when inflation and economic growth have reduced the burden they impose”.

The debt deal will reduce the country’s debt burden in two ways, says Dermot O’Leary, chief economist at Goodbody Stockbrokers and one of ECR’s contributors – “in terms of the net present value of the debt, as the maturity of that debt is increased quite dramatically, and, secondly, on the funding side”.

                                     Source: Euromoney Country Risk
Ireland’s risk assessment has been improving steadily in 2012, after ECR expert’s notched up the country’s overall ECR score by 0.3 points to 57.3 in January 2013.

The country’s bank stability and government finance indicators are among the county’s economic indicators that have seen improvements in 2012, reflecting perhaps the Irish government’s hard-fought battle in reaching an agreement with the ECB to reduce its debt servicing costs.

The government has been in talks with the ECB since it took office in February 2012 to reach a deal on the country’s bank bailout costs.

Looking ahead to next quarter, analysts are sounding bearish on the country’s risk outlook. “The deal will help Ireland recover and it’s the best deal Ireland could have got in the circumstances,” says Dermot O’Leary.

The deal points towards an improved fiscal outlook for Ireland during the next decade and the decision is seen largely as credit positive by analysts. These factors should assist Ireland leaving its EU-IMF programme as planned in 2013.

Already, Standard and Poor’s has revised Ireland’s BBB+ rating to stable from negative, while the country’s borrowing costs fell to below 4% for the first time since 2007.

Ireland’s deficit peaked at 12.6% of GDP in 2010, after a bailout of the banking sector caused the government to accept an EU-IMF programme to assist in its deficit-reduction targets.

However, fiscal consolidation efforts have narrowed that deficit to 8.6% of GDP in 2012. The OECD forecasts Ireland’s debt-to-GDP to peak at 123% in 2012, while economic growth is expected to slow to 0.5% from a revised outlook of 0.7%, according to the Central Bank of Ireland.

This article was originally published by Euromoney Country Risk. To find out more: register for a free trial at