DUBLIN (Reuters) - Standard & Poor's upgraded its outlook on Ireland's credit rating on Friday, saying its debt may fall faster than expected, nurturing European Union hopes for at least one bailout success story.
The upgrade to positive from stable on Ireland's BBB-plus rating comes ahead of a planned year-end exit from its EU/IMF bailout, and backs its status as Europe's strongest bailed out economy amid political turmoil in Portugal and Greece.
The upgrade will also fuel expectations that Moody's, the only major rating agency that rates Irish sovereign debt as non- investment grade, could at least take the country off negative watch in the coming months.
"The outlook revision reflects our view that Ireland's general government debt burden is likely to decline more rapidly, as a percentage of GDP, than we had previously expected," S&P said in a statement.
"Ireland's economic recovery is under way," it said
S&P said it saw a more than one-in-three probability it would raise Ireland's credit rating during the next two years, citing expectations that national debt will fall from 122 percent of GDP in 2013 to 112 percent by 2016.
It also praised the "strong consensus" among the country's largest political parties for fiscal consolidation and reform.
"When you look at some of the cliff-hangers we have had in the rest of the periphery, Ireland has kept its head down and got on with it and I think that has been recognized," said Philip O'Sullivan, chief economist at NCB Stockbrokers.
"What S&P has done today illustrates the widening gap between the Moody's stance and how many others on the market view the country. We see a Moody's upgrade as a question of when, not if."
Portugal's president threw the bailed-out euro zone country into disarray on Thursday by rejecting plans to heal a government rift and calling for early elections next year.
Fellow aid recipient Greece is in its sixth straight year of recession with unemployment at record highs, while its lenders extend financing in installments to keep pressure on the shaky coalition government for reforms.
Data recently showed Ireland had unexpectedly tipped into recession for the first time in four years.
But S&P said that while external demand remains weak, Ireland's domestic economy is showing signs of stabilizing with unemployment declining and house prices showing signs of bottoming out.
The country's flexible, open economy and favorable demographics means it has the potential to grow by 2 percent per year, it said.
Standard & Poor's had the country on negative outlook until February, when Dublin struck a long-awaited deal with the European Central Bank allowing it to convert promissory notes into long-term bonds. That effectively gave Dublin far longer to repay debts it ran up as it rescued the Irish banking system.
(Reporting by Conor Humphries and Wayne Cole; Editing by Hugh Lawson)
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