Issuer Debt Rated Rating Trend

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1 Rating Report November 22, 2013 Previous Report: November 26, 2012 Analysts Michael Heydt Fergus McCormick Republic of Ratings Issuer Debt Rated Rating Trend, Republic of Long-Term Foreign Currency Issuer Rating A (low) Negative, Republic of Long-Term Local Currency Issuer Rating A (low) Negative, Republic of Short-Term Foreign Currency Issuer Rating R-1 (low) Stable, Republic of Short-Term Local Currency Issuer Rating R-1 (low) Stable Rating Rationale DBRS, Inc. (DBRS) has confirmed the Republic of s long-term foreign and local currency issuer ratings at A (low) and maintained the Negative trends. DBRS has also confirmed the short-term foreign and local currency issuer ratings at R-1 (low) and maintained the Stable trends. The rating confirmation reflects s strong commitment to fiscal consolidation, evidence of macroeconomic rebalancing, and emerging signs of economic recovery. The coalition government has already made substantial progress on fiscal consolidation and the 2014 budget aims to reduce the deficit further. Positive developments on the fiscal side have been accompanied by improving macroeconomic conditions. Recent data in the labor and housing markets are early signs that the recovery is broadening. The IMF projects the Irish economy will expand 0.6% in 2013 and 1.8% in However, these supportive factors are balanced by significant challenges: the fiscal deficit is still large, the public and private sectors are heavily indebted, and the banking system continues to face deteriorating asset quality and weak profitability. The Negative trend reflects DBRS s assessment that risks stemming from the external environment remain skewed to the downside and that the expected primary fiscal balance in 2014 is still short of its debtstabilizing threshold. However, the trend could be changed to Stable, potentially in the near term, if there is greater evidence of a sustained economic recovery and fiscal consolidation remains on track. (Continued on page 2) Rating Considerations Strengths (1) Highly open, productive economy (2) Young, highly educated workforce (3) Flexible labor market (4) Benefits of EMU membership Challenges (1) High public debt (2) Large fiscal imbalances (3) Weakened financial sector (4) Household indebtedness (5) Long-term unemployment Summary Statistics For the year ended December E 2014P Nominal GDP (EUR billions) GDP per capita (EUR) 35,542 35,752 36,266 37,305 Real GDP (% chg) 2.2% 0.2% 0.6% 1.8% Unemployment rate (year end %) 14.8% 14.1% 13.1% 12.3% CPI Inflation (year end, %) 1.4% 1.7% 1.0% 1.2% Current account balance (% GDP) 1.2% 4.4% 4.4% 4.1% External debt (% GDP) 314.9% 299.2% 283.2% n/a General gov't balance (% GDP)* -8.9% -8.2% -7.5% -4.9% Primary balance (% GDP)* -5.7% -4.5% -2.5% 0.0% Gross public debt (% GDP) 104.1% 117.4% 123.3% 121.0% Human Development Index n/a n/a * Excluding bank recapitalization costs : Gross General Government Debt (% of GDP) Sovereign Ratings Group

2 Rating Rationale (Continued from page 1) Recent activity indicators are generally positive and appear broad-based. Perhaps most importantly, there are encouraging signs in the labor market. Total employment increased by 1.8%, or nearly 34,000 jobs, over the last year while the unemployment rate declined to 13.7% in the second quarter of Data on the number of people seeking unemployment assistance suggests that the unemployment rate continued to fall through October Headwinds to growth from the housing sector also appear to be receding. Residential property prices have stabilized overall, although dynamics vary significantly between Dublin and the rest of the country. In addition, investment and construction employment have bottomed out after six years of depressed activity. The Ulster Bank Construction PMI index suggests that a recovery in the sector is gaining traction, albeit from very low levels. If sustained, these positive dynamics bode well for consumption and investment. 2 Sovereign Ratings Group Macroeconomic imbalances built up during the boom years are also being unwound. Fiscal accounts have already undergone a sizeable adjustment. Data through October 2013 suggest that the government is broadly on track to meet the 7.5% of GDP deficit ceiling set out in the EU-IMF program, and the 2014 budget aims to narrow the deficit to 4.8% of GDP. Moderate fiscal tightening in 2015 combined with some cyclical recovery will likely be sufficient to put debt dynamics on a downward trajectory. On the external side, improved competitiveness has supported export growth and this, combined with subdued domestic demand, has led to a large adjustment in the external balances. The current account is in a surplus position. In sum, the fiscal and external adjustments have put the economy in a better position to support sustainable growth. is exiting a three-year EU-IMF program in a strong funding position. The buildup of cash balances by the NTMA, the promissory note deal, and the maturity extension of official loans have significantly eased post-program funding pressures. In fact, is fully funded through early Market conditions for Irish sovereign debt have also improved substantially over the last three years. Borrowing costs are currently well below levels prevailing prior to the EU-IMF program. The absence of a precautionary credit line does not have a material impact on the ratings or trends. The principal risk to s outlook, in DBRS s view, stems from the external environment. As a highly open economy, the strength of s recovery depends in large part on events in the Euro area, the United Kingdom and the United States. Policy action at the European level has helped calm market volatility, but the Euro area outlook is still characterized by a high degree of uncertainty with downside risks stemming from high debt overhang, weak competitiveness and the threat of political instability in several Euro area economies. An adverse external shock could have large effects on s recovery and delay the stabilization of public debt dynamics. On the domestic front, tight credit conditions and highly indebted households could pose challenges to the recovery. Irish banks face deteriorating asset quality and weak profitability. Further deterioration could result in greater-than-anticipated capital erosion and exacerbate credit conditions for the real economy. Moreover, Irish households remain heavily indebted, despite five years of deleveraging. A prolonged period of balance sheet repair could dampen the recovery in domestic demand. DBRS is also concerned about the effects of high unemployment over the medium term. Of those unemployed aged 20 to 64, over 44% have been out of work for two years or longer. Disengagement from the labor market and the mismatch between the qualifications of the unemployed and those sought by employers could lead to higher structural unemployment, thereby lowering the economy s potential rate of growth. Foreign Versus Local Currency Ratings s debt is generally issued exclusively in Euros. Because of its history of openness to trade and capital flows and the reserve currency status of the Euro, DBRS sees no evidence that would differentiate among any of its contractual debt obligations based on the currency the debt is denominated in. Fiscal Management and Policy has demonstrated a strong commitment to adjust fiscal accounts. According to the IMF, the structural primary deficit narrowed from approximately 10% of potential GDP in 2008 to 0.3% in 2013, with most of

3 the correction coming from the expenditure side. Further adjustment is expected in As a result, nearly 90% of the cumulative structural adjustment planned from 2008 to 2015 will be achieved by the end of next year. 10% : General Government Fiscal Balance (% of GDP) 10% 5% 5% 0% 0% -5% -5% -10% -10% -15% -15% -20% Bank Recapitalization Costs General Government Balance -20% -25% Structural Balance (% of Potential GDP) -25% -30% -30% -35% * 2014* 2015* 2016* -35% 3 Sovereign Ratings Group Source: International Monetary Fund, DBRS. Exchequer revenues and expenditures through the first ten months of 2013 indicate that fiscal accounts are broadly on track to meet the deficit target of 7.5% of GDP set out in the EU-IMF program. Income tax and value-added tax, the two largest sources of tax revenue, were slightly behind schedule but the shortfall was largely offset by stronger than expected corporate tax receipts. Positive results on the revenue side have been accompanied by tight budget execution across most spending categories. While the adjustment has proceeded well thus far, the fiscal deficit is still large and further consolidation is required in order to reduce the deficit below 3% of GDP by The 2014 Budget, which outlined 2.5 billion in consolidation measures, aims to narrow the deficit to 4.8% of GDP. This is within the 5.1% deficit ceiling set by the EU-IMF program. Of the consolidation measures, 1.6 billion is expected from the expenditure side; the remaining 0.9 billion is from higher revenues. The government has outlined deficitreduction measures totaling 2.0 billion for 2015, although the specific measures have yet to be identified. Notwithstanding this progress, the ongoing fiscal adjustment has limited room to maneuver. Weaker than expected growth could lower tax revenues and increase cyclical expenditures, thereby complicating efforts to achieve the 3% deficit target by In addition, achieving planned savings in public sector pay and pensions, as projected in the 2013 Haddington Road Agreement, could prove challenging. If fiscal outcomes underperform targets over the next two years, adopting additional consolidation measures could be politically difficult, particularly as elections approach in February Even if the 3% deficit target is reached in 2015, tight fiscal policy will be required in the second half of the decade to achieve medium-term objectives. Reforms to the budgetary framework enacted during the EU-IMF program should improve fiscal planning and strengthen spending discipline. Two new rules a structural budget rule and debt reduction rule have been put in place to comply with the requirements of the Fiscal Compact. In addition, an independent Fiscal Advisory Council was established to provide a critical evaluation of the budgetary position and its underlying macroeconomic forecast. These reforms are underpinned by the Fiscal Responsibility Law, which the government passed in December Multi-year expenditure ceilings, which were already operational but were made legally binding this year, will also help improve budget execution and medium-term planning. Debt and Liquidity A deep economic recession, large fiscal deficits and costly bank recapitalizations led to a sharp rise in s public debt ratios. General government debt increased from 24.8% of GDP in 2007 to 117.4% in Over that period, cumulative fiscal deficits excluding support for the financial system totaled 75.2 billion (46% of GDP), while bank recapitalizations amounted to 64.1 billion (39% of GDP). Of the latter, more than half was from the recapitalization of Anglo Irish Bank Corporation Limited and Irish Nationwide Building Society.

4 According to the IMF, general government debt in is projected to peak at 123% of GDP in 2013 and decline to 110% by However, the trajectory of gross debt ratios is affected by the NTMA s decision to build up large cash buffers in To get a clearer picture of the underlying debt dynamics, we assess net public debt, which deducts highly liquid assets from gross liabilities. In the baseline scenario illustrated below, the primary fiscal balance is still short of reaching its debt-stabilizing threshold in As a result, net public debt-to-gdp continues to rise. However, with additional consolidation and some cyclical recovery in 2015, the primary surplus should increase sufficiently to put debt ratios on a downward path. 130% 125% 120% 115% 110% 105% 100% 95% 90% 85% 80% 75% 70% : Net Public Debt (% of GDP) Baseline Growth Shock Contingent Liability Shock Combined Shock 130% 125% 120% 115% 110% 105% 100% 95% 90% 85% 80% 75% 70% 65% 4 Sovereign Ratings Group Source: International Monetary Fund WEO October 2013, Central Statistics Office, Haver Analytics, DBRS. Nevertheless, debt dynamics are sensitive to growth. Assuming negative GDP growth in 2014 and approximately 1% growth thereafter, as illustrated in the growth shock scenario, debt ratios continue to rise and only approach stabilization at the end of the outlook period. In other words, if s economic performance substantially underperforms, additional fiscal consolidation measures beyond those currently planned in 2015 could be needed to stabilize debt dynamics. Contingent liabilities stemming from sovereign support of the banking system are large but declining. Outstanding government-guaranteed bonds of the National Asset Management Agency (NAMA) amounted to 23.2 billion (14% of GDP) in October NAMA aims to recover outlays from asset sales, loan repayments and rental income by With cash generation of 14 billion as of October 2013, the agency has already redeemed 7.0 billion in senior bonds, covered operational and funding costs, approved advances of nearly 2 billion and retained 3.6 billion in liquid asset holdings. Consequently, NAMA is strongly positioned to meet its first redemption target of 7.5 billion by the end of Nevertheless, if downside risks to the macroeconomic outlook materialize, the likelihood of calls on NAMA bonds could increase. The liquidation of Irish Bank Resolution Corporation (IBRC) announced in February 2013 could also reveal bank losses. As part of a series of transactions to wind-up IBRC, NAMA recently issued 12.9 billion (8% of GDP) in government-guaranteed senior debt to the Central Bank of (CBI). In return, NAMA acquired the remaining non-promissory note assets of IBRC. These assets are being independently valued by liquidators and prepared for sale. The sale process is expected to conclude by early Unsold assets will be managed by NAMA with the intent to maximize the return to taxpayers. If the valuations do not cover the NAMA bonds issued to the CBI, the Exchequer would be required to make up the difference. In addition, there is a risk that Irish banks will require additional capital following the EU-wide stress tests to be carried out in While European leaders announced at a summit on June 29 th, 2012 that the European Stability Mechanism (ESM) would be able to directly recapitalize banks once a single bank supervisor is established, it is not clear if the ESM will act as public backstop. Moreover, the prospect of European leaders agreeing to utilize the ESM to buy the Irish government s existing stakes in ongoing banks appears unlikely at this point. Given the scale of the contingent liabilities and the uncertainty regarding their materialization, a relatively large shock equivalent to 7.5% of GDP is assumed in the contingent liability scenario, as shown in the chart above. Consistent with the one-off nature of this shock, the debt ratios peak at a higher level than the baseline 65%

5 scenario but start to decline in 2015 due to the primary surplus position and economic recovery. The combined shock scenario incorporates simultaneous growth, fiscal and contingent liability shocks. In this very adverse scenario, debt ratios increase substantially and only stabilize in As prepares to exit the EU-IMF program at the end of 2013, several measures have significantly eased post-program funding requirements. First, as part of the IBRC liquidation, the government replaced the promissory notes, which had amortizing structures, with 25- to 40-year government bonds with bullet redemptions. The National Treasury Management Agency (NTMA) estimates that the promissory note deal reduced s funding needs by close to 20 billion over the next decade. Second, European policymakers agreed to extend official loan maturities by seven years. This helps alleviate redemption pressures through Third, the NTMA took advantage of improved market conditions to build up sizable cash balances. With 25.6 billion in liquid asset holdings at the end of September 2013, is fully funded through early The strong funding profile puts in a relatively good position to exit the EU-IMF program at the end of 2013 without a precautionary credit line. Market conditions for Irish sovereign debt have improved substantially over the last three years. Borrowing costs are currently below levels prevailing at the start of the EU-IMF program. The NTMA plans to raise 6 billion to 10 billion starting early next year in order to prefund the rest of Economic Structure and Performance The Irish economy has suffered from a series of large economic and financial shocks. Gross domestic product contracted 11.5% from its peak in the fourth quarter of 2007 to its trough in the fourth quarter of This is double the decline experienced across the Euro area. Although positive growth returned in 2011, the recovery has been tepid and uneven. Three and a half years after output reached its nadir, GDP is still 9.3% below the pre-crisis peak. The severity and duration of the shock reflect both the scale of domestic imbalances built up prior to the crisis as well as the weak external demand conditions following the onset of the international financial crisis and Euro area sovereign debt crisis. However, there are encouraging signs that a recovery is starting to gain traction. 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% : Employment Growth and Domestic Demand Growth 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% 5 Sovereign Ratings Group Employment Growth (annual) Real Domestic Demand Growth (rolling 4 quarters) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Central Statistics Office, Eurostat, Haver Analytics, DBRS. Improvements in labor market conditions suggest that the recovery could be broadening. Total employment increased by 1.8%, or nearly 34,000 jobs, over the last year while the unemployment rate declined to 13.7% in the second quarter of 2013 after peaking at 15.1% in early Recent data on the number of people seeking unemployment assistance suggests that the unemployment rate continued to fall through October The improvement also appears broad-based, as most sectors of the economy experienced employment growth over the last year. Notable exceptions to this trend include public administration and defense, which highlights the private sector s role as the primary driver of recent employment growth. Furthermore, the quality of the jobs being created appears to be improving. Most of the job gains in the first half of 2013 were full-time, although part-time underemployment remains exceptionally high. If sustained, these positive labor market dynamics bode well for disposable income growth and consumer confidence. -8% -10% -12%

6 Headwinds to growth from the housing sector also appear to be receding. In terms of residential property prices, two distinct trends are emerging. On the one hand, housing prices outside the capital continue to fall year over year, although at a very modest pace. Supply overhang continues to pose challenges for some markets, particularly in northern and western counties. Residential prices in Dublin, on the other hand, were up 12.3% (y-o-y) in September Rising prices have been largely driven by the limited supply. The emerging need for additional housing in urban areas bodes well for the construction sector. In fact, high frequency indicators suggest that construction is stabilizing: housing output is bottoming out at very low levels, investment in housing and other construction is now expanding, and construction employment has leveled off. Moreover, the Ulster Bank Construction PMI index indicates that growth in the sector is gaining momentum, albeit from very low levels. Negative wealth effects associated with declining housing prices have also started to ease. For the household sector, net wealth declined from 716 billion in 2007 to 446 billion in the second quarter of This deterioration was almost entirely due to a 50% decline in housing prices. However, improving home prices have supported households efforts to repair their balance sheets. In the second quarter of 2012, household net wealth was up 25 billion over the previous year. Restoring net wealth could be positive for consumption going forward. As a highly open economy, the strength of s recovery depends in large part on demand from key trading partners. Weak external demand combined with patent expiration in the pharmaceutical sector negatively affected Irish exports in the first half of 2013, but high frequency indicators suggest that exports picked up in the third quarter. The IMF expects Irish export growth to accelerate in 2014 and 2015 as the patent effects wane and economic activity strengthens in the United States, the United Kingdom and the Euro area. DBRS believes this is a reasonable baseline scenario. However, the external outlook is characterized by a high degree of uncertainty and, in DBRS s view, risks are skewed to the downside. Policy action at the European level has helped calm market volatility, but macroeconomic weaknesses and the threat of political instability in several countries underline the fragility of the Euro area economy. Escalation of the Euro area crisis would likely damage s fragile recovery. 260% 240% 220% 200% 180% 160% 140% 120% 100% 80% : Household Debt and Savings Rate Household Debt / Disposable Income (lhs) Household Savings Rate (rhs) 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 60% 6 Sovereign Ratings Group Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Note: Household debt includes short-term loans, long-term loans and other accounts receivable/payable. Source: Central Statistics Office, Central Bank of, Haver Analytics, DBRS. Q Q Q Q Q Q In addition, private debt overhang and high long-term unemployment pose significant challenges. Facing large debt burdens and declining disposable incomes, households immediately responded to the crisis by reducing spending and increasing savings. This response reflected precautionary behavior on the part of households, as well as a recognition that weakened balance sheets needed to be repaired. Households repaid 33.7 billion in net outstanding debt from the fourth quarter of 2008 to the second quarter of 2013 a 15.8% decline. While households deleverage, incomes have also fallen substantially. The result is that household debt as a share of gross disposable income has remained high at 210%. This suggests that balance sheet repair could persist over the medium term and dampen the recovery in consumption. On the other hand, the decline in savings over the last year could indicate that precautionary behavior on the part of households is moderating. 6%

7 The prominent role of multinational corporations (MNCs) in the Irish corporate landscape partly accounts for the very high levels of non-financial corporate (NFC) debt in. In fact, NFC debt has increased since 2008 as MNCs have taken advantage of their access to international markets and parent financing. On the other hand, indigenous firms are deleveraging after a substantial increase in debt during the boom years. From January 2003 to August 2008, outstanding loans to NFCs by Irish credit institutions increased from 46.5 billion to billion, much of which was channeled into the property sector. Five years later, outstanding credit has declined by 52% to 81.8 billion. Repayments account for only 13.4 billion of the decline; the rest has either been written down or transferred to NAMA (where is it is still a financial liability of the NFC sector). So far there are few signs that the deleveraging process is slowing, and even if domestic demand conditions improve, indigenous firms could face supply-side credit constraints. Monetary Policy and Financial Stability Significant progress has been made to restructure and recapitalize the Irish banking system. Losses have moderated, funding profiles have improved and the deleveraging targets for the two largest Irish banks have been met. However, weak profitability and deteriorating asset quality continue to be sources of concern. Without sustained improvement, banks could have difficulty generating sufficient capital internally to supply credit to the real economy and meet Basel III requirements. Bank of (BOI), Allied Irish Banks (AIB) and Permanent TSB (PTSB) continue to take measures to improve earnings and restore profitability. Net interest margins increased over the last year as funding costs moderated and loan spreads widened. Banks also cut operating costs, and fee expenses are expected to decline as the Eligible Liabilities Guarantee (ELG) scheme costs are phased out. As a result, pre-provision net revenue of the domestic banks improved in the first half of 2013 relative to the prior year. However, returning to net profitability will remain a key challenge, particularly for PTSB, as low-yielding tracker mortgages and significant impairment charges continue to weigh on the sector s outlook. On a positive note, banks have improved their funding profiles and met their deleveraging objectives. Deposits have been stable over the last year, even as the ELG scheme closed in March At the same time, all three domestic banks have successfully returned to the capital markets. In 2013, BOI and AIB have both issued covered bonds and a senior unsecured bond while PTSB issued a 500 million RMBS. Improving funding profiles have been accompanied by a reduction in funding requirements, as banks have significantly reduced the size of their balance sheets. At the end of June 2013, BOI and AIB had loan-to-deposit ratios of 121% and 106%, respectively. The result has been a substantial decline in borrowing from the ECB. Eurosystem funding fell to 31 billion in October 2013 from 62 billion one year earlier. With liquidation of IBRC, emergency liquidity assistance from the CBI was also eliminated. 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 : Primary Dwelling Mortgage Arrears (millions of ) PDH Mortgage Arrears Over 180 Days Due (lhs) PDH Mortgage Arrears Days Due (lhs) PDH Mortgage Arrears Up to 90 Days Due (rhs) 10,000 9,500 9,000 8,500 8,000 7,500 7,000 6,500 6,000 5, ,000 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Central Bank of, Haver Analytics, DBRS. 7 Sovereign Ratings Group However, rising mortgage arrears continues to be a major challenge for the banking sector. The value of principal-dwelling home (PDH) mortgages over 90 days in arrears increased from 4.9 billion in September 2009 to 18.6 billion in June This accounts for 17.0% of the outstanding mortgage balance. Buy-to-let (BTL) lending, although smaller in scale, is faring even worse. The share of BTL mortgages more than 90

8 days in arrears was 28.5% in June However, there are signs that PDH mortgage arrears are starting to stabilize. Early-stage arrears (less than 90 days) have been on a slight downward trend since the end of Although banks have been slow to address mortgage arrears, steps are being taken to accelerate this process. The CBI recently introduced mortgage arrears resolution targets. This framework provides banks with deadlines to propose and conclude durable solutions with customers. By the end of March 2014, banks must make an offer to 70% of mortgage customers in arrears (90 days or more) and conclude durable solutions for 25%. Other measures to address rising arrears include the commencement of the new personal insolvency regime. This December 2012 legislation aims to provide an out-of-court framework for debt restructuring for households with unsustainable debt burdens while minimizing any negative effects on payment discipline. In addition, the repossessions framework was strengthened in 2013, which could facilitate the loan modification process. The CBI in consultation with the EC, ECB and the IMF is conducting an extensive balance sheet assessment of the three domestic banks. The balance sheet assessment will review asset classification, provisioning and risk weighting. This process will inform the 2014 stress test, which will be conducted in coordination with the European Banking Authority. The potential need for additional capital will partly depend on the precise capital rules applied as well as the stringency of the stress tests. In DBRS s view, the publication of the Prudential Capital Assessment Review (PCAR) and Prudential Liquidity Assessment Review (PLAR) in March 2011 was a milestone in terms of providing a credible and transparent assessment of bank capital and liquidity positions. The performance of the economy and the behavior of housing prices since the 2011 PCAR/PLAR assessment has largely been between the base and stress scenarios while the costs associated with deleveraging have been less than anticipated. Nevertheless, credit conditions remain tight amid banks weak profitability. Loans to households and nonfinancial corporations in September 2013 declined at an annual rate of 4.2% and 4.5%, respectively. While this trend reflects low credit demand as the private sector manages overstretched balance sheets, it also appears to reflect supply-side factors. Credit standards are tight, particularly for small- and medium-sized firms. On the other hand, net mortgage lending appears to be stabilizing at very low volumes. According to the latest ECB survey, mortgage demand increased and credit standards eased in the first three quarters of 2013 before tightening again in the fourth quarter. As demand picks up, the capacity of banks to supply credit to productive sectors of the economy will be essential to support the recovery over the medium term. Balance of Payments From the introduction of the Euro to the onset of the global financial crisis, nominal exchange rate appreciation combined with high price and labor cost inflation led to a deterioration in s international price competitiveness, as illustrated by the appreciation of the real effective exchange rate. This trend was accompanied by widening current account deficits and rising net external liabilities : Current Account and Real Effective Exchange Rate Current Account Balance (% of GDP, rhs) Real Effective Exchange Rate (lhs) 1999Q2 1999Q4 2000Q2 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q2 2011Q4 2012Q2 2012Q4 2013Q2 Note: REER is the Harmonized Competitiveness Indicator deflated by economy-wide unit labor costs. Source: Central Bank of, Central Statistics Office, DBRS. 8% 6% 4% 2% 0% -2% -4% -6% -8% 8 Sovereign Ratings Group

9 However, recent indicators suggest that much of the lost competitiveness has been recovered over the last four years. Unit labor costs improved relative to other Euro area economies from 2009 to While this partly reflects the contraction in low-productivity sectors, such as construction, it is also the result of relative wage adjustments and productivity gains. Furthermore, the Euro has depreciated marginally in nominal terms against the dollar and sterling since 2009, which is particularly important for the Irish economy given its openness and the large share of exports destined for the United States and United Kingdom. 9 Sovereign Ratings Group Amid improving price competitiveness and weak domestic demand, the external accounts have rapidly adjusted. The current account shifted from a deficit of 6.7% of GDP (rolling 4 quarters) in the third quarter of 2008 to a surplus of 5.6% in the second quarter of It is important to note that the current account surplus is likely exaggerated due to the accounting treatment of several PLCs that recently moved their headquarters to (as opposed to genuine foreign direct investment by multinationals that have chosen to operate in ). Notwithstanding this statistical issue, overall trends point to an external rebalancing. The expiration of pharmaceutical patents has recently contributed to a substantial decline in merchandise exports. Annual exports of organic chemicals and medicinal and pharmaceutical products, which cumulatively account for half of goods exports, declined from a peak of 47.1 billion in November 2011 to 40.6 billion by September However, patent expirations are expected to have a modest effect on the real economy. The sector is not labor-intensive and lower exports will be largely offset by declines in royalty payments and profit remittances. On the other hand, services have become an increasingly important part of s export base. Services accounted for 52% of total exports in the second quarter of 2013, up from 20% in Over the last decade, the growth of services exports has helped offset the stagnant performance of merchandise exports. Services exports expanded 9.6% in 2011 and 10.8% in 2012 before decelerating in the first half of Of particular importance has been the expansion of computer service exports, which rose by 12.6% in 2011 and 13.6% in While multinational firms performed comparatively well through the global financial crisis, Irish-owned companies faced greater challenges. Nearly half of indigenous firms exports are destined for the United Kingdom. Therefore, the sharp depreciation of sterling against the Euro from 2007 to 2009 led to a substantial deterioration in Irish firms competitiveness. Weak domestic demand and limited access to finance added to the difficulties. However, several factors have helped reverse indigenous firms lost competitiveness, including wage adjustments, declining commercial property costs and a modest appreciation of sterling against the Euro. Moreover, recent activity in the United Kingdom suggests that economic conditions are starting to improve. This could have positive implications not only for exports but also for the labor market, as Irish-owned companies tend to be more labor-intensive than multinational firms. Political Environment Last general election: February 2011 Next general election: February 2016 Party in power: Fine Gael led coalition Dáil: Fine Gael won 76 out of 166 seats; Labour Party won 37 Early elections held in February 2011 delivered a coalition government between center-right Fine Gael and the center-left Labour Party. Each party won 76 and 37 seats, respectively, giving the coalition a large majority in the Dáil. Fine Gael leader Enda Kenny became Taoiseach (Prime Minister) while Labour leader Eamon Gilmore took the position of Tánaiste (Deputy Prime Minister) and Minister of Foreign Affairs and Trade. The coalition government has demonstrated a strong commitment to fiscal consolidation and financial sector reform. Quantitative performance criteria and structural benchmarks under the EU-IMF program have largely been achieved. The government recently presented a budget that aims to reduce the deficit to 4.8% of GDP in 2014 and additional deficit-reduction measures are planned for If the coalition runs its full term, the next general election will not be held until early However, the fiscal consolidation plan will require politically difficult choices over the next two years. Austerity measures could lead to tensions within the coalition, particularly if the economic environment does not show signs of improvement.

10 : Selected Indicators For the year ended December 31 ( billions unless otherwise noted) Public Sector Debt General Government Debt % GDP 24.9% 44.2% 64.4% 91.2% 104.1% 117.4% Domestic Debt General Government Gross Debt % GDP 9.0% 12.1% 18.1% 40.2% 40.2% 41.8% External Debt General Government % GDP 15.9% 32.0% 46.3% 51.0% 63.9% 75.6% Monetary Authorities % GDP 0.4% 24.7% 33.0% 91.8% 74.1% 48.4% Private Sector % GDP 191% 177% 175% Gross External % GDP 334% 315% 299% Private Sector Debt Household % GDP 106.6% 118.6% 129.1% 125.1% 117.8% 111.6% Non-Financial Firms % GDP 186.1% 225.7% 257.0% 272.9% 290.5% 293.4% Fiscal Balances (% GDP) Revenues 36.7% 35.4% 34.5% 34.9% 34.0% 34.5% Expenditures 36.7% 42.7% 48.3% 65.4% 47.1% 42.6% Interest Payments 1.0% 1.3% 2.0% 3.2% 3.2% 3.6% Interest Payments (% Revenues) 2.8% 3.8% 5.9% 9.0% 9.4% 10.5% General Government Primary Balance 1.1% -6.0% -11.7% -27.4% -9.9% -4.5% General Government Balance 0.1% -7.3% -13.7% -30.6% -13.1% -8.2% General Government Balance (ex bank recaps) 0.1% -7.3% -11.4% -10.5% -8.9% -8.2% Balance of Payments & Liquidity Current Account Balance % GDP -5.3% -5.6% -2.3% 1.1% 1.2% 4.4% Goods and Services Balance (% GDP) 9.9% 9.0% 15.8% 18.4% 21.5% 24.1% Net Foreign Direct Investment (% GDP) 1.4% -13.4% -0.4% 9.8% 10.9% 9.4% International Investment Position % GDP -63.0% -79.2% -75.9% -86.8% -108% -110% External Assets External Liabilities Sources: Department of Finance, Central Bank of, Central Statistics Office, Eurostat, IMF, Haver Analytics Note: Non-International Financial Services Centre (IFSC) Private Sector External Debt is not available prior to External Debt (non-ifsc) is defined as liabilities to non-residents other than equity and financial derivatives. 10 Sovereign Ratings Group

11 Ratings History Issuer Debt Rated Current Republic of Long-Term Foreign Currency Issuer Rating A (low) A (low) A (low) A (high) Republic of Long-Term Local Currency Issuer Rating A (low) A (low) A (low) A (high) Republic of Long-Term Foreign Currency Issuer Rating R-1 (low) R-1 (low) n/a n/a Republic of Long-Term Local Currency Issuer Rating R-1 (low) R-1 (low) n/a n/a Notes: All figures are in Euros (EUR) unless otherwise noted. This rating is endorsed by DBRS Ratings Limited for use in the European Union. 11 Sovereign Ratings Group Copyright 2013, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided as is and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON