EU Ruling on NAMA Debt Purchases Mitigates Credit Rating Downgrade Pressure

A preliminary ruling by the EU statistics agency, Eurostat, that purchases of bank loans by the National Assets Management Agency (NAMA) will not be counted on the official government debt figure, has largely staved off further credit rating downgrades for Ireland. This decision, validated by leading European analyst Ciaran O'Hagan, has helped alleviate immediate pressure on Ireland's creditworthiness, leading ratings agencies to adopt a wait-and-see attitude, at least preventing a downgrade to AA for Standard & Poor's and Aa1 for Moody's.

Key Takeaways:

• The EU ruling will not count NAMA's purchases of bank loans on Ireland's official government debt figure, thereby mitigating concern from ratings agencies.
• The main ratings agencies have threatened one more downgrade, citing rapid rise in Irish public debt, potential liabilities from bank guarantees, and poor economic growth outlook.
• Conditions have improved since mid-summer, with market sentiment improving, albeit remaining poor, and the Government signaling intent to continue the fiscal correction plan in the Budget.
• NAMA is giving banks bonds worth €54 billion in return for loans originally valued at €77 billion but currently thought to be worth €47 billion.
• Ireland's credit rating is still under pressure, with Standard & Poor's and Moody's adopting a negative outlook, but the EU ruling is expected to prevent a further downgrade.
• The government has signalled that it will continue the fiscal correction plan in the Budget, but this year's deficit target is likely to be missed, with borrowing unlikely to fall below 12% of GDP next year.

Statistics:

• €54 billion: The value of bonds given by NAMA to banks in return for loans.
• €77 billion: The original value of the loans bought by NAMA.
• €47 billion: The current value of the loans at which NAMA is thought to have bought them.
• 12%: The percentage of GDP above which Ireland's borrowing is unlikely to fall.
• AA: The rating Ireland is expected to maintain for Standard & Poor's.
• Aa1: The rating Ireland is expected to maintain for Moody's.

Sources:

• Ciaran O'Hagan, research note for Societe General in Paris (exact quote and source not specified).
• European analyst quoted, no specific name mentioned.
• EU statistics agency (Eurostat).
• National Assets Management Agency (NAMA).
• Standard & Poor's.
• Moody's.