Fitch Downgrades Ireland's Sovereign Rating to 'AA-'; Outlook Stable

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11:09 04Nov09 Fitch Downgrades Ireland's Sovereign Rating to 'AA-'; Outlook Stable

LONDON, November 04 (Fitch) Fitch Ratings has today downgraded the Republic of Ireland's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'AA- ' from 'AA+' respectively. The Outlook on the Long-term IDR is Stable.

Fitch has simultaneously affirmed Ireland's Short-term foreign currency IDR at 'F1+' and Country Ceiling at 'AAA', the ceiling appropriate for euro area
members.

"Fitch has downgraded Ireland's sovereign ratings to reflect the severity of the decline in nominal GDP and the exceptional rise in government liabilities," said Chris Pryce, Director in Fitch's Sovereign Group. "However, the agency notes the vigour of the government's fiscal consolidation response to date, the expectation of further aggressive budget tightening and the likely success of the National Asset Management Agency (NAMA) in rehabilitating the banking sector. All these factors have helped stabilise the outlook for Ireland's creditworthiness."

The rating downgrade partly reflects the severity of the economic adjustment underway, entailing a far greater actual and expected decline in nominal GDP, about 9% in 2009 and a cumulative 14% between 2007 and 2010, compared with other high grade sovereigns. Fitch believes that private sector de-leveraging pressures are likely to be more severe in Ireland than other advanced economies, reflecting falling wages and rising unemployment, high household debt levels and further expected falls in house prices, whilst the willingness of banks to lend is likely to remain subdued. The agency also believes that the continued weakness in the domestic economy will contribute to a further shortfall of tax
revenue in 2009 of around EUR2bn, compared to the April 2009 supplementary budget forecasts. The agency forecasts that Ireland's fiscal deficit is likely to reach 12.5% of GDP in 2009 and remain at 12% in 2010.

The breadth and depth of the country's banking sector problems have
substantially increased sovereign risk. NAMA is set to inject EUR54bn of fiscal resources - a third of GDP - into the banks in exchange for property and development loans after applying a 30% haircut to the book value of the loans.

The banks will in turn recognise about EUR23bn of losses and are likely to
require additional state capital. Government debt ratios are rising very rapidly due to large fiscal deficits, the fall in GDP and additional liabilities
associated with banking sector support measures. Gross government debt including NAMA liabilities will rise to over 110% of GDP by the end of 2010 (77% excluding NAMA). As recently as the end of 2007, gross government debt was just 25% of GDP. The rise in debt is likely to push the ratio of debt interest payments to revenue above 15%, one of the highest among Fitch-rated sovereigns in the 'AA' range, reducing fiscal flexibility.
However, Fitch does not expect Ireland's credit profile to deteriorate further from this level, as reflected in the Stable Outlook.

"The Irish government's fiscal consolidation response to date has been
impressive with cumulative savings of 5% of GDP implemented in 2009, and a planned further round of major spending cuts expected to be announced in December's budget," said Douglas Renwick, Associate Director in Fitch's
Sovereign Group. "In addition, Fitch believes that NAMA is likely to be
successful in stabilising and rehabilitating the banking sector, providing both solvency and liquidity support and mitigating pressures on the supply of new credit to industry and households."

The agency expects the economy will resume a growth trajectory in late 2010 or 2011, driven by expected improvements in wage competitiveness and dynamism in the large, high value added and diverse export sector.
Furthermore, Ireland's membership of the euro area and its highly open economy mitigate the risk of deflation becoming entrenched over the medium term. Fitch expects the gross government debt-to-GDP ratio to stabilise at 111% including NAMA (80% excluding NAMA) from 2011. Sizeable government cash balances - of 15% of GDP at end-Q309 - mean that net debt ratios will be substantially lower. In addition, NAMA's liabilities are backed by potentially offsetting assets - over the longer term the government is likely to recoup a substantial share of its outlays to NAMA.