Ireland: Rapid Credit Upgrades And The Impact Of Brexit

Global IRB banks have been steadily upgrading the Irish Government over the past year ; and the country’s long term rating was recently upgraded by Fitch and Moody’s. This was mirrored in the upgrade of the CBC* by one notch.

This improving bank view of Ireland reflects a robust trade surplus and a manageable budget position. But for many commentators, Ireland’s short term economic future depends heavily on the outcome of the impending Brexit negotiations. Since joining the Euro, the country has successfully diversified its trade towards the EU (Its largest export market is the USA, with Belgium in second place) but trade with the UK remains significant. Two recent reports from the Irish Agriculture & Food Development authority, and from the IBEC business lobby group, have both raised concerns about a potentially negative Brexit effect on the Irish trade balance, especially in agriculture.

The IBEC report also points to the potentially positive impact of changing domiciles and increased Foreign Direct Investment (FDI) displaced from the UK. The financial services sector is the obvious potential beneficiary, but as the largest remaining English-speaking EU country Ireland also offers a benign and low-tax environment for FDI. There have been some high-profile declarations of loyalty to the UK (e.g. Siemens) but Ireland already seems to feature in a number of corporate contingency plans.

*CBC = Credit Benchmark Consensus; a 21-category scale which is explicitly linked to probability of default estimates sourced from major banks. A CBC of bbb+ is broadly comparable with BBB+ from S&P and Fitch or Baa1 from Moody’s.

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