Irish comeback offers a safer eurozone bet

Ireland’s risk score has been improving for the past two-and-a-half years, according to Euromoney’s Country Risk Survey, rebounding from 57.0 out of a maximum 100 points at the beginning of 2012 to 61.9 as of early September.

Bond yields are down from their post-crisis highs, and a five-year CDS spread of 51 basis points represents a substantial tightening.

No fewer than 11 of the 15 surveyed economic, political and structural risk indicators have been awarded higher scores by Irish experts during the past year alone. The remaining four are unchanged.

Improving scores have sent the sovereign racing back up Euromoney’s global rankings to a respectable 37th out of 189 surveyed. Placed toward the top of ECR’s tier three – signifying a BB+ to A- credit rating – Ireland is awarded A- by both Fitch and Standard & Poor’s, with the latter contemplating an upgrade, and Baa1 on Moody’s scale.

Risks remain

Constantin Gurdgiev, adjunct professor at Trinity College Dublin, is wary of a fiscally neutral budget for 2015 and notable pre-election stimulus in 2016.

The cabinet reshuffle after heavy local and European Parliament election defeats earlier this year has empowered the anti-austerity, pro-stimulus ministers and backbenchers.

The wider eurozone recovery is stalling, and by easing back on the fiscal levers that have brought Ireland to this stage there’s a risk the gross debt, which topped 124% of GDP in 2013, will become more difficult to resolve, with uncertainty plaguing privatization and bank debt relief.

“The immediate state of the public finances is weak, with Ireland’s debt-servicing costs amounting to some €5.5 billion during the first eight months of 2014,” notes Gurdgiev.

Besides, structural reforms are lagging, which if unwound or terminated would undermine the long-term sustainability of the public finances.

On the other hand, the government has managed to lower the general government gross deficit from an eye-popping 31% of GDP in 2010 to 7.2% by the end of last year, and more progress is likely with the economy growing briskly.

A broad-based expansion should deliver real GDP growth of around 3% this year and finance minister Michael Noonan sees the deficit falling to 4% of GDP, potentially achieving the stability programme target of 3% by 2015.

Indeed, as Gurdgiev acknowledges: “A fiscally neutral budget for 2015 might be a prudent approach to retaining some of the gains achieved during the crisis and allowing growth to deliver more aggressive consolidation over the course of next year in the fiscal metrics.”

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.