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.
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”.
In spite of these reservations though, Ireland does appear to have made a break from the rest of the so-called peripheral European economies.
“The Irish economy has some structural benefits relative to other peripheral economies and these should be the areas of focus for other countries seeking to rehabilitate themselves in the eyes of international investors,” SVM’s Mr Veitch said.
The peripheral economies – mainly Greece and Portugal – remain under bailout conditions and are understandably striving to follow in Ireland’s footsteps and regain entry to the capital markets.
They have all been prescribed the same medicine, “however Greece and Ireland are two very different economies and not comparable”, Ms Holdsworth said.
“The bailout countries have all had to tighten their fiscal policies and utilise structural reforms of the labour market, for example. In the case of Ireland, it has had to recapitalise its banks as well as carry out structural reforms.
“These were badly hit economies that suffered severe recessions. In each of the bailout countries, inflation has gone down, which means that exports are more competitive. This gives them a better trade position. Greece and Portugal are following the same policies to a lesser extent.”
Aside from issues around an “overhang of private debt”, Ireland appears to be actually recovering rather than just appearing to do so.
Ms Holdsworth said: “With low inflation rates we are seeing an increasing export share and current account positions turning round.
“Its banking systems have been biased towards their own debt markets [and these are] freely tradeable. This means that other people who can buy into the debt market are doing so.”
The move by Moody’s was no doubt welcome news to Ireland, which made the grade by “a recent acceleration in economic growth and fiscal consolidation, both of which should deliver a steady improvement in debt ratios”, Mr Veitch said.
If Ireland is to reclaim its ‘Celtic tiger’ title, it will have to maintain this positive momentum and hold down its cost of borrowing while stoking economic growth.
What Moody’s said:
Moody’s raised Ireland’s debt rating from Ba1 to Baa3 with a “positive outlook”. It said the decision had been driven by a recent acceleration in Irish economic growth “which indicates an increased likelihood of securing the sustained long-term growth needed to achieve a turnround in Ireland’s public finances”.
It also heaped praise on Ireland's government which it said had “regularly outperformed quantitative fiscal goals, which helped it regain and retain market confidence”.
The ratings agency also noted how the yield on Irish debt had been “virtually impervious last year to various market events such as the Federal Reserve’s announcement that it would be gradually reducing its purchases of US government securities”.
