Standard & Poor’s raised its outlook on Ireland’s sovereign rating today, saying the government may exceed its targets for debt reduction as the economy recovers.
The ratings company lifted the outlook on the nation’s BBB+ grade to positive from stable, it said in a statement today. There is a one-in-three chance the rating will be raised in the next two years.
“Ireland could over-achieve its fiscal targets and reduce its government debt faster than we currently expect,” S&P said. “Ireland’s economic recovery is under way.”
S&P also affirmed Germany’s AAA rating today with a stable outlook. That judgment and its view on Ireland contrasts with the company’s decision earlier this week to cut its rating on Italy’s debt to BBB from BBB+, with a negative outlook, because of that country’s continued recession. Investors often ignore ratings, evidenced by the rally in Treasuries after the U.S. lost its top grade at S&P in 2011.
The Irish government is pressing on with budget savings after needing a bailout in 2010 and is also working on a plan to recoup some of the money it plowed into failing lenders. From the euro area’s backstop fund.
S&P said Ireland’s government debt will peak at 122 percent of gross domestic product this year and decline to 112 percent by 2016. It said the “strong consensus” among the country’s largest political parties for fiscal consolidation “supports Ireland’s policy and institutional effectiveness.”
While the economy is recovering, S&P said weak foreign demand means growth will remain slow this year and next and risks to the outlook remain. Banks still have “very high levels” of non-performing loans and the country’s access to external funding is “fragile.”
The yield on 10-year Irish bonds was 3.897 percent today. While it’s up from a low of 3.41 percent in May, it reached a peak of 14.219 percent in 2011.
Yields on sovereign securities moved in the opposite direction from what ratings suggested in 53 percent of 32 upgrades, downgrades and changes in credit outlook last year, according to data compiled by Bloomberg published in December. Investors ignored 56 percent of Moody’s rating and outlook changes and 50 percent of those by Standard and Poor’s. That’s worse than the longer-term average of 47 percent, based on more than 300 changes since 1974.
On Germany, S&P said today that it predicts the economy to maintain “steady” growth in the medium term.
“The stable outlook on our long-term rating on Germany reflects our expectation that its public finances will continue to withstand potential financial and economic shocks and that consensus in favor of prudent economic policies will remain,” S&P said.