Ireland’s stress tests were a massive success and have cleared a path for the country towards debt sustainability, according to Morgan Stanley.
Analysts feel that the stress tests, coupled with losses banks have already experienced, are an honest appraisal of the situation in the country.
From Morgan Stanley:
The stabilisation of the Irish banking system that we expect the stress test to facilitate should allow the economic turnaround already underway to boost investor confidence in Ireland’s medium-term debt sustainability. Specifically, we expect government debt to stabilise at about 120% of GDP by 2013 and start to decline gradually in 2014/15, with the potential for a more meaningful decline if the government is able to re-privatize its banking system and certain other assets.
It should be noted that Morgan Stanley’s conclusions are based on the perceived “fully liberalized” nature of the Irish economy. Should Ireland have to sacrifice its low tax rate for any sort of bargain with the IMF-EU, its future growth may come into doubt, and so to its debt situation.
Morgan Stanley are suggesting a buy on “long-dated Irish sovereign cash bonds.”
Further, earlier this morning Moody’s came to nearly the opposite conclusion on the Irish situation, believing the banks now to be fine in the wake of the stress tests, but the sovereign to remain unstable.
Note, Morgan Stanley’s expectations improve if the Irish government is able to force bank bondholders to take haircuts.
Photo: Morgan Stanley