08 February 2013

Fitch: Ireland deal eases fiscal pressure, improves transparency

Ireland's agreement to replace the promissory notes provided to IBRC is positive for the sovereign. It reduces refinancing needs, eases medium-term fiscal pressure, and makes Ireland's public finances more transparent. However, it has limited impact on Ireland's debt stock.

The agreement significantly cuts the Irish sovereign's funding requirement. The government estimates it will have to borrow less than €1 billion a year to service the interest on the new government bonds, compared with payments of over €3 billion annually on the promissory notes. It also simplifies the complex and opaque arrangements including ELA loans parallel with the promissory notes that have been in place since the financial crisis.

The Irish government estimates the interest saved on the new government bonds compared with the promissory notes to be worth about €1.1 billion in 2013, €0.9 billion in 2014, and €0.7 billion in 2015. In 2013, the savings are cancelled out by the estimated costs of liquidating IBRC, but in both 2014 and 2015, the result should be to lower the government's budget deficit by 0.6 per cent of GDP.

Lower cash flow financing needs and greater transparency can add to the positive momentum behind Ireland's push to regain full bond market access (our base case already assumes this will happen by the end of 2013). Nevertheless, the deal has limited immediate impact on the sovereign's overall debt level. Fitch maintains its view that debt to GDP will peak in 2013-2014 at about 120 per cent of GDP and then fall gradually. So although a deal was not factored into Fitch's baseline projection and is a positive surprise, it does not affect Ireland's public debt dynamics sufficiently to change Fitch's ratings assessment in the short run.

However, by extending the average duration of the sovereign's total debt stock (by approximately three years, to above 10 years), Ireland will have one of the highest average maturity profiles among Fitch-rated sovereigns.

The Irish authorities said on Thursday that the Irish Government and the European Central Bank had agreed to replace the promissory notes with long-term government bonds, with maturities ranging from 25 to 40 years. Irish Bank Resolution Corporation Limited, the asset recovery bank created by the merger of Anglo Irish Bank and Irish Nationwide in 2011, was liquidated.

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