So what was really behind Ireland’s furious reaction to this week’s S&P downgrade?
Did a looming refinancing of government guaranteed bank debt play a part?
We know that a big chunk of government-guaranteed Irish bank debt is set to expire in September. According to Citigroup, the figure is some €13bn — and over half of this on just two days:
The two year government guarantee covering the debt of the six main lrish banks and building societies expires on 29 September. Any difficulties that the banks have in rolling over debt will add to the government’s woes and could further damage market sentiment. According to our estimates, government guaranteed debt of these six institutions expiring in September totals approximately 13bn, of which 83% is in EUR, 9% in GBP. Over half of this matures on just two days: over a quarter matures on 09 September and one week later, on 16 September, another third matures.
Given that Ireland needs all the help it can get in getting this refinancing away, the timing of Standard & Poor’s move is unfortunate to say the least.
That said, it’s not so much S&P’s decision to downgrade that’s unhelpful — after all Ireland was trading much wider than an AA- credit anyway — but the fact that it has placed a negative outlook on the country’s debt, says RBS:
The one-notch downgrade is not the main concern, but the negative outlook is more so. The ratings apply to government guaranteed senior bank debt as well. Moody’s rates Ireland Aa2 stable and Fitch AA- stable, so S&P has the most aggressive stance on Ireland, reflecting purely the concerns of the cost of supporting the banking sector. The additional cost of bailing out Anglo is a big part of the re-rate. S&P has increased its estimate of the cost to the Irish government of recapitalizing banks to EUR45 billion-EUR50 billion from EUR30 billion-EUR35 billion. This looks a bit high to us now and our equity analyst still believes the direct capital injections by the government are likely to remain in the EUR33-37bn range.
Still, it’s not all bad news.
Barclays Capital reckons there’s enough demand out there:
Since bank stress test results were released in mid July we have argued that investors will use the primary market to cover shorts over the coming months, and that this should ensure sufficient demand exists to meet substantial supply. In fact, we think the risk is that EUR-denominated issuance could fall short of what many expect.
But — going back to Citi — if you’re not looking to cover a position, buying Irish debt remains iffy:
Even with the European Stability Fund ultimately standing behind the cohesion of the Euro area, the current bout of risk aversion and uncertainty surrounding the total cost of the bank bailouts makes buying Ireland outright (or selling it versus Spain) a trade best left to the very brave, in our view. Although Irish spreads to Germany have surpassed the levels seen in the midst of the sovereign debt crisis, yields have not but could easily do so. Bottom picking requires deep pockets and we would rather respect the current price action.
Related links:
Mmm, Irish yield stew – FT Alphaville
Those increasing Irish haircuts - FT Alphaville
The Big Pfffft and the Euro-peripherals – FT Alphaville