David Buik Comments: Mixed Views From Abroad on Debt Downgrade - Irishtimes.com

The National Treasury Management Agency (NTMA) reacted swiftly and negatively to Tuesday night’s debt downgrade from Standard & Poor’s (S&P), with its chief executive John Corrigan instantly dismissing the ratings agency’s analysis as “flawed”.

As with the S&P downgrade, the audience for the NTMA’s criticism was international, with perceptions of Irish fiscal stability on markets abroad key to the State’s success or failure in borrowing the funds it needs to remain afloat.

With the dust settling on the S&P move, we took the investment temperature within three of the markets where Irish bond investors would normally be found.

CITY OF LONDON

“Who would ever have thought that the market would start to compare Ireland with Iceland,” mused City veteran David Buik, of BGC Partners, as the London markets digested the S&P downgrade. But there was more sympathy than schadenfreude in London following Tuesday’s surprise overnight move by the ratings agency – after all, there’s little the City, or the coalition government, fears more at the moment than the loss of the UK’s prized Triple-A rating.

There was some admiration for the combative stance taken by NTMA’s John Corrigan, as he dared to disagree publicly with S&P: the ratings agencies have as few friends here as they do in Dublin and New York.

And many analysts queried S&P’s decision to apply no value to the property and land loans held by Nama, including its valuable London assets.

But, although the timing of the rating change may have been a surprise, the downgrade itself was not.

“Whilst the downgrade is negative we question how much of that is already priced in given the negative noises around Ireland’s banking sector over the last few weeks,” said Deutsche Bank strategist Jim Reid in London.

“The downside risk for the rating is a material deterioration of the banking sector and/or the economy from here,” he added.

Ireland’s descent “from paragon to pariah” had been a swift one, said Commerzbank’s Peter Dixon, especially as at the start of the year it had been regarded as one of the euro zone peripherals “most likely to get its house in order. While the situation was never as rosy as was painted, we suspect that the recent rating downgrade is in response to the worst possible case and not the most likely outcome”.

Assuming Ireland is still able to generate a primary budget surplus by 2013 and that the economy recovers, then the debt to GDP ratio can still be stabilised – “albeit above the 84 per cent level which the Government currently predicts,” Dixon said.

But, he added, “What the Government probably ought not to do is to push through additional fiscal retrenchment, and it may opt to follow the UK lead and exclude the effects of financial-sector transactions on the fiscal balances. It would make life much simpler.”

For Robert Crossley at Citibank, the next big test for Ireland will come in September. According to his estimates, €13 billion of Irish Government guaranteed bank debt expires next month – and over half of this on just two days, September 9th and 16th. Any difficulties the banks have in rolling over debt will add to the Government’s woes and could further damage market sentiment.

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