Formation of government has not ended political uncertainty – ratings agency Fitch

The formation of a government has not brought an end to political uncertainty, ratings agency Fitch has warned.

Although uncertainty has been reduced, it hasn’t been eliminated because it isn’t clear how much of its legislative programme the minority government will be able to implement, the ratings giant said.

The agency also warned that possible intervention in the mortgage market could be a “negative” for Irish banks, as it warned that a cut in mortgage interest rates would slow profitability improvement and the build up of capital.

And it said that a “credible threat of home repossession” could incentivise those borrowers in long-term arrears to engage with their lenders.

“We think it is positive that a government has been formed ahead of the UK’s referendum on EU membership on 23 June. If the UK voted to leave the EU …. having a government in place to formulate a policy response and engage in ‘Brexit’ negotiations could help to contain the potential damage to economic confidence in Ireland,” it said.

“The country is one of the most exposed in the EU to the UK via merchandise and service exports.

“Nevertheless, political uncertainty has not been eliminated. It is unclear how much of its legislative programme the minority government will be able to implement with Fianna Fail’s limited support.”

Fitch said that over the medium term, the arrangement between Fine Gael and Fianna Fail could lead to an increase in support for more radical parties.

“However, improving economic conditions may offset this; we expect household income growth to remain strong over the next two years,” it said.

Fitch pointed out that the agreement between the parties includes a commitment to “protect the family home and introduce additional long-term solutions for mortgage arrears cases” and take “all necessary action to tackle high variable rates.”

“Without more details, it is hard to say how this will affect Irish mortgage lenders. If banks cut mortgage rates, it could slow profitability improvement and the build-up of capital through retained earnings,” the agency said.

“It remains to be seen if protecting the family home will make it harder for banks to repossess primary residences. The regulatory environment in Ireland strongly favours restructuring over repossession…but a credible threat of home repossession can incentivise borrowers to engage with lenders in the restructuring process.”

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