Research Update: Rating On Republic of Ireland Affirmed At 'BBB+' On Ongoing Commitment To Stabilizing Public Finances; Outlook Stable

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1 August 5, 2011 Research Update: Rating On Republic of Ireland Affirmed At 'BBB+' On Ongoing Commitment To Stabilizing Public Finances; Outlook Stable Sovereign Ratings Group: David T Beers, Managing Director, London (44) ;david_beers@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List 1

2 Research Update: Rating On Republic of Ireland Affirmed At 'BBB+' On Ongoing Commitment To Stabilizing Overview In our view the Irish economy is prosperous and open, with flexible product and labor markets, although medium-term growth prospects are constrained by high levels of public and private debt. In our opinion, the government of the Republic of Ireland has demonstrated the commitment and capacity to stabilize public finances following a severe banking crisis and a structural deterioration in the fiscal balance. We are therefore affirming the sovereign credit ratings on Ireland at 'BBB+/A-2'. The outlook on the ratings is stable. Rating Action On Aug. 5, 2011, Standard & Poor's Ratings Services affirmed its 'BBB+' long-term sovereign credit rating on the Republic of Ireland. At the same time, the 'A-2' short-term rating was also affirmed. The outlook on the ratings is stable. The transfer and convertibility (T&C) assessment is 'AAA', as it is for all members of the European Economic and Monetary Union (EMU). The affirmation also applies to other ratings that depend on Ireland's sovereign credit rating, including the issuer credit ratings on the National Asset Management Agency (NAMA) and the Ireland-based Housing Finance Agency PLC. Rationale The ratings on the Republic of Ireland reflect our view of the government's commitment and capacity to stabilize public finances following a severe banking crisis and a structural deterioration in the fiscal balance. We believe that Ireland's creditworthiness is sustained by a strong political consensus in favor of fiscal consolidation, which should reduce the general government deficit to around 3% of GDP by We also view Ireland's competitiveness gains since late 2008 and open economy as being supportive of modest, export-led economic growth over the medium term. In our opinion, the Irish government's fiscal strategy should be capable of putting the public finances on a more sustainable path. Following the Heads of State or Government of the Euro Area and EU Institutions statement of July 21, 2011, we expect the interest rate on the European Financial Stability Facility Standard & Poor s RatingsDirect on the Global Credit Portal August 5,

3 Research Update: Rating On Republic of Ireland Affirmed At 'BBB+' On Ongoing Commitment To Stabilizing (EFSF: foreign currency AAA/Stable/--) portion ( 17.7 billion) of Ireland's 67.5 billion external support package to decrease to about 4.5%, from about 6.0%. We estimate the saving to the Irish government on interest payments will be around 0.9 billion (0.6% of GDP) cumulatively over The maturities on EFSF loans are also expected to be lengthened as part of the Heads of State agreement. Meanwhile, it is also possible that interest rate reductions will be extended to Ireland's European Financial Stability Mechanism ( 22.5 billion) and bilateral borrowings ( 4.8 billion). In our view, the Irish government has sufficient funding under its external support package to cover its financing requirements until the second half of At this time we expect Ireland will look to refinance a 11.9 billion bond maturing Jan. 15, We expect Ireland's marginal funding costs at this time to have declined to rates of around 6% or lower, a level that in our view would not put the government's debt dynamics at risk. Such funding rates would, we believe, be commensurate with the Irish government's success at convincing the capital markets that its primary fiscal balance and growth prospects are sufficient to put the public finances on a more sustainable path. On the other hand, any failure to meet these fiscal targets or to restore growth of the domestic economy could imply locking-in higher nominal interest rates, which we believe would likely damage debt sustainability. As well as attempting to halve the 2010 structural deficit of around 10% of GDP by 2015, the Irish authorities are also contending with the aftermath of a severe banking crisis. In our view, the assumptions underlying the central bank's Financial Measures Programme were robust (see "Ireland's Ratings Lowered To 'BBB+/A-2' And Removed From CreditWatch; Stable Outlook Reflects Credibility Of Stress Test," April 1, 2011) and we do not expect any further material costs to the government of supporting the domestic banking system over and above the 64 billion (41% of GDP) in capital already injected and the 28 billion (18% of GDP) in National Asset Management Agency (NAMA: local currency BBB+/Stable/A-2) debt securities issued (see Related Research below). We expect Ireland's net general government debt burden will peak at about 110% of GDP in 2013, including NAMA's debt obligations, before falling to about 103% of GDP in Excluding NAMA obligations, we expect net debt to peak at around 97% of GDP in In our view, Ireland is the most open economy in the euro area, with exports estimated to exceed 105% of GDP and on track to expand an estimated 7% in volume terms this year. In absolute terms, Ireland's merchandise trade balance, which hit an all-time high of US$48 billion (31% of GDP) in 2010, is the third highest in the euro area, despite Ireland's position as the twelfth-largest economy in the EU-17. Due to its openness, Irish output is sensitive to any potential external demand shocks, as well as to the level of the real exchange rate (which has been depreciating due to declining nominal wages). Most of the gross value added from Ireland's export sector gets transferred abroad via dividend payments. Moreover, the international tradables sector has so far contributed little in the form of new employment to the Irish economy. Nevertheless, the second round impact of the export 3

4 Research Update: Rating On Republic of Ireland Affirmed At 'BBB+' On Ongoing Commitment To Stabilizing sector on job creation, domestic incomes, and public finances should not be understated. Standard & Poor's projects that Ireland's real per capita GDP will increase by 0.3% during 2011, driven exclusively by net exports and accelerating toward 2.0% by We expect real domestic demand will continue to decline until 2013 and could be further depressed as the European Central Bank (ECB) embarks on a monetary policy tightening cycle. At end-2010, 86% of Irish residential mortgages carried flexible interest rates. Meanwhile, external demand could also weaken. The 'AAA' T&C assessment, which applies to all EMU members, reflects Standard & Poor's view that there is an extremely low risk of the ECB restricting access to foreign exchange needed for debt service. Outlook The stable outlook reflects our view of the balanced risks to Ireland's creditworthiness. However, if the government doesn't achieve its fiscal strategy, downward pressure on the ratings could build. Alternatively, were the economy to return more quickly to average real GDP per capita growth rates above our current expectation of 1.6% during , we could consider raising the ratings. Related Criteria And Research Sovereign Government Rating Methodology And Assumptions, June 30, 2011 Explaining Standard & Poor's Adjustments To Ireland's Public Debt Data, Aug. 24, 2010 Republic of Ireland Long-Term Rating Lowered To 'AA-' On Higher Banking Sector Fiscal Costs; Outlook Negative, Aug. 24, 2010 Sovereign Credit Ratings: A Primer, May 29, 2008 Ratings List Ratings Affirmed Ireland (Republic of) National Asset Management Agency (NAMA) Sovereign Credit Rating BBB+/Stable/A-2 Ireland (Republic of) Transfer & Convertibility Assessment AAA Senior Unsecured BBB+ Commercial Paper A-2 Certificate Of Deposit Local Currency A-2 Standard & Poor s RatingsDirect on the Global Credit Portal August 5,

5 Research Update: Rating On Republic of Ireland Affirmed At 'BBB+' On Ongoing Commitment To Stabilizing Housing Finance Agency PLC Commercial Paper* A-2 National Asset Management Ltd. Short-Term Debt* A-2 Commercial Paper* A-2 *Guaranteed by Republic of Ireland. Additional Contact: Sovereign Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495)

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