Irish Woes Continue w Cut in Credit Rating
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Just a few weeks ago, we did a Feature on how “well” – that is, poorly – the austerity program now being prescribed all over the “advanced” world was working out for Ireland.
Just a few weeks ago, we did a Feature on how “well” – that is, poorly – the austerity program now being prescribed all over the “advanced” world was working out for Ireland.
And just to prove how right we were, it now turns out that Warren Buffett‘s Moody’s Investor Service, itself under fire, along with all the OTHER credit ratings agencies,
has NOT been impressed with all the Irish suffering we described, and cut their credit rating.
Ireland’s efforts to pull out of a deep economic slump suffered a setback after a major firm downgraded the country’s bond rating, citing a weak banking system and rising debt.
Moody’s Investors Service downgraded Ireland one notch, to Aa2 from Aa1, although it remained comfortably above junk level.
Moody’s also changed the outlook on the ratings to stable from negative.
“Today’s downgrade is primarily driven by the Irish government’s gradual but significant loss of financial strength,
as reflected by its deteriorating debt affordability,” a senior credit officer at Moody’s, Dietmar Hornung, said.
The Moody’s downgrade put its ratings in line with other agencies.
Standard & Poor’s downgraded Ireland to AA in June 2009, after lowering it to AA+ from AAA in March 2009.
Fitch downgraded Ireland to AA+ from AAA in April 2009, then to AA- in November 2009.
Moody’s also said that the downgrade had been driven by the increased burden in liability for banks after a series of recapitalization measures led by the state.
As a result, yields on the benchmark 10-year Irish bond rose slightly, by 0.04 percentage point.
Gerard Fitzpatrick, fixed income portfolio manager at Russell Investments in London,
said “relatively modest” market reaction to the downgrade — and one the previous week for Portugal —
“indicates that the market has largely priced in the negative factors driving these downgrades.”
“This is especially true given the austerity measures in place which in the long term aim at limiting debt to G.D.P. ratios,” he added.
In a sense, the near-term pressure is off Dublin.
The government does not face any redemptions of benchmark bonds this year
and it has raised sufficient money to last until the first quarter of 2011 —
regardless of the outcome of on-going sales, analysts said.
Recent bond sales by other European governments under pressure, like Spain and Portugal,
have been stronger than some analysts had expected, given the size of their national deficits.
Once one of the fastest-growing economies in Europe, Ireland has suffered a drastic turnaround as the removal of easy credit and a crash in home prices hurt consumer confidence.
The economy shrank 7.1 percent last year, causing a steep decline in tax revenue.
The ratio of debt to gross domestic product rose to 64 percent by the end of 2009,
from 25 percent before the crisis, and was continuing to grow.
Moody’s predicted it would stabilize at 95 percent to 100 percent over the next two to three years.
The budget went from surpluses in 2006 and 2007 to a staggering deficit of 14.3 percent of G.D.P. last year —
worse than the deficit in Greece.
It continues to deteriorate – which shows how “effective” austerity programs are.
Joblessness in the country of 4.5 million is now above 13 percent, according to this piece in the New York Times.
In response to the rising deficit, Irish politicians have raised taxes and cut salaries for nurses, professors and other public workers by as much as 20 percent.
They have also thrown money into the country’s main lenders to prevent bank failures.
Moody’s said that the recapitalization measures announced to date could reach almost 25 billion euros, equivalent to 15.3 percent of Ireland’s G.D.P. last year.
Moody’s said that it expected Anglo Irish Bank, the most troubled, might need further support.
The International Monetary Fund said last week that the country would not meet a European Union deadline to reduce its budget deficit to 3 percent of G.D.P. by 2014.
