Ireland’s sovereign debt has been restored to A grade status with the decision last week by ratings agency Moody to join the two other major agencies that have already done so. From a position where in mid 2011, Ireland’s debt had been cut to junk status – with the cost of borrowing soaring to more than 14 per cent – it has since dropped to below one per cent.
The latest re-rating is a welcome boost for the new minority government, with Moody’s giving it a vote of confidence at a critical time. The agency’s reasoning was clear: its reassessment and re-rating of debt was prompted both by strong economic growth and the sharp reduction in government debt. By the end of last year, debt to gross domestic product (GDP) had dropped to 94 per cent and is set to fall further.
For the National Treasury Management Agency (NTMA) which borrows on the State's behalf, the upgrade will make borrowing both easier and cheaper. Easier because it ensures the NTMA will have access to a wider range of international investors, and cheaper because the premium sovereign rating that Ireland now enjoys will ensure lower yields – interest rates – on debt sold.
Ireland's favourable position stands in contrast to that of Portugal, a peripheral euro zone economy that, like Ireland, was subject to an international bailout. But unlike Ireland, Portugal's failure to meet fiscal targets since it successfully exited its bailout has meant it is facing possible financial sanctions from the European Commission.
Moody's considers that in Ireland's case – and despite the time taken to form a minority administration – that the risk of a reversal of fiscal consolidation is low. And it also estimates that should Britain vote to leave the European Union next month, the outcome for Ireland of a Brexit should be "manageable". On both issues it has taken a remarkably sanguine view.
The ratings agency retains a positive outlook on Ireland’s credit rating which will be reviewed again in September. How well the new administration deals with the economic challenges in the interim will determine whether Ireland qualifies then for a further upgrade.