Irish-domiciled money market funds (MMFs) rated ‘AAAmmf’ have a limited link to Ireland’s credit profile and should not be directly affected by the country’s sovereign rating, notably in the event of an extreme eurozone stress, according to Fitch Ratings.
Fitch believes that transfer and convertibility (T&C) risk is remote for Irish-domiciled MMFs; this would be an important factor should the risk of an Irish exit from the eurozone increase, although this is not Fitch’s central scenario. In such a hypothetical scenario, Irish-domiciled MMFs could potentially be rated above the Irish Country Ceiling.
Country Ceiling ratings capture the risk of exchange controls being imposed and materially impeding the private sector’s ability to convert local currency into foreign currency. Such controls – known as T&C risk – may also hinder the transfer of proceeds to non-resident creditors. The Irish Country Celling rating is ‘AAA’.
Fitch believes that Irish-domiciled MMFs face minimal convertibility risk. They are offshore products with offshore assets and largely offshore investors. The universe of Fitch-rated MMFs does not have exposure to Irish assets or issuers, having liquidated any exposures in early 2011. Fund investments are denominated in the same currency (euros, pounds, or US dollars) as that of the shareholder, limiting convertibility risk. Fitch expects Irish-domiciled MMFs to continue to make payments in the currency of the fund even in the unlikely event of Ireland leaving the eurozone.
Fitch continues to believe that transfer risk for Irish MMFs is extremely low, as the implementation of capital controls in Ireland would be difficult to operate, costly and contrary to the law.
The fund sector is important to the Irish economy which should make the imposition of T&C controls remote. As at end-June 2012 the total assets of funds under administration in Ireland were EUR2.2trn and MMF assets accounted for EUR305bn or around a third of the total European MMF universe. The total International Financial Services Centre tax contribution was around EUR1.4bn, or 36 per cent of total Irish corporation tax paid in 2010, augmented by payroll taxes.
Under the unlikely scenario of controls on capital flows, Fitch expects that funds would be exempt from T&C constraints, although Fitch would likely review its willingness to rate Irish-domiciled MMFs at ‘AAAmmf’ were Ireland’s sovereign/Country Ceiling ratings to be materially downgraded, reflecting heightened political risk.
Fitch has ‘AAAmmf’ ratings on 24 Irish-domiciled MMFs, of which seven are euro-denominated.