S&P lifts Ireland outlook as market return nears

S&P raised its outlook on Ireland's BBB-plus rating to stable from negative, leaving Moody's as the only major rating agency with a downbeat outlook on Irish government bonds.

Dublin struck a long-awaited deal with the European Central Bank last week allowing it to convert promissory notes into long-term bonds, effectively giving it far longer to repay debts it ran up in rescuing the Irish banking system.

“The exchange of promissory notes, which the government had provided to Irish Bank Resolution Corporation, for long-dated government bonds, should reduce the government's debt-servicing costs and lower refinancing risk,” S&P said in a statement.

“We believe the success of the exchange increases the likelihood of a full return by Ireland to private financing and, therefore, of Ireland successfully exiting the EU/IMF bailout program, at the end of 2013.”

S&P, which expedited Ireland's path towards a November 2010 bailout with a ratings cut three months before that, said it could lower its outlook again if Ireland failed to comply with its bailout conditions or raise enough cash to meet its funding need, and if growth slows amid a weaker external environment.

Alternatively it said it could consider raising the rating if the government sustains its fiscal strategy or can sell its sizable holdings in the almost fully state-owned banking sector, both of which would help reduce its still-high public debt.

“Bizarre” Moody's

Fitch rewarded Ireland for fiscal and funding progress much praised among fellow eurozone states by raising its outlook to stable from negative in November. It rates Ireland at BBB-plus, which, like S&P, leaves it three notches above junk status.

Fitch said last week that Dublin's debt deal was positive, easing medium-term fiscal pressure, but that the same risks remained as when it raised its outlook, notably around a weak growth outlook.

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