Why the Celtic tiger may be set to roar again

The move by the last of the big three ratings agencies to upgrade Ireland’s debt from ‘junk’ to ‘investment grade’ has been broadly welcomed by markets, with many fund managers bullish about its prospects for continued recovery.

The country, once dubbed the ‘Celtic tiger’, crumbled during the financial crisis, having to bail out its banks and then seek financial support from the European Union, European Central Bank and International Monetary Fund – collectively known as the troika.

This support came with the proviso the country submitted to an action plan of deficit-busting austerity measures – requirements Ireland was able to opt out of in December last year.

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It was this easing of austerity that prompted the move last month by Moody’s Investors Service to upgrade Ireland’s credit rating, briefly pushing yields on Ireland’s five-year debt below that of the UK, the US and Sweden.

Another major development in Ireland’s recovery has been its ability to issue bonds for the first time since its bailout.

“The recent upgrade and investment-grade rating from the three major ratings agencies should open the door to more positive inflows into the Irish market from more conservative investors,” said Patrick O’Donnell, fixed income manager at Aberdeen Asset Management.

SVM’s global and UK investment director Neil Veitch was also positive about Ireland’s prospects.

“Ireland’s ability to recover the confidence of the market has been bolstered by a pick-up in domestic demand and a reduction in the contingent liabilities of the banking sector,” he said.

Threadneedle’s European equities manager Dan Ison said Ireland and Spain were “the poster children of the eurozone reforms”.

“Both have exited their troika programmes,” he said. “Spain can easily finance itself in open markets and Ireland has recently conducted its first bond sale since the bailout.

“Unit labour costs – a good proxy for competitiveness – have fallen significantly from their peaks in both countries. Perhaps more importantly their employment is now growing. Irish GDP saw a clear rebound, with particular strength in building and construction, and investment in machinery and equipment.”

But there are reasons to keep the Champagne on ice for a little while longer.

Kames Capital fixed income investment manager Sandra Holdsworth cautioned against being über bullish about Ireland just yet, given it still had several hurdles to overcome.

“The amount Ireland has had to pay has not gone down,” she said. “What has changed is its ability to repay the money. It has not started repaying the money and continues to run a budget deficit.

“Prospects for the economy are better and in time it should be able to start repaying the debt, possibly in about 3-4 years’ time, during which it should be able to stabilise its total debt-to-GDP ratio. As the economy grows faster we should see this ratio stabilise by 2015.”

And Mr O’Donnell said that while the small, open, export-led economy had responded well to the developed market upturn, he was “still wary about the overhang of private debt”.