Irish economy downgraded

The luck of the Irish seems not to be in effect for now, or its powers have been temporarily dulled by the ongoing economic slowdown. Standard & Poor’s, the U.S based financial services company, has cut Ireland’s debt rating from its previous rating to AA minus. The reasons quoted for the revision of the rating was the voluminous cost of trying to plug the leaks in Ireland’s banking institutions. Like banking bodies the world over, Irish banks too are still hard pressed even after concerted efforts were undertaken to stop the hemorrhaging.

The news comes on the back of worries among the financial community about the state of Ireland’s finances and market doubts seem to have been correct to an extent. While the Irish government is a safe bet as far as being able to pay up its obligations goes, the associated cost of insuring against any possible default by the Irish has risen to 25% over the last twelve months. In addition, Irish bonds are commanding a massive premium compared to the considerably safer German bonds.

Standard & Poor’s has also stated in their report that an expected (and indeed ongoing) revitalization and recapitalization of the financial system will cost the Irish dearly, with the figure expected to be near € 45 to 50 billion Euros. That figure is massive in the scheme of things and the cost of doing so, which is wholly necessary, will see the Irish government take on a whole new level of debt that will surpass the country’s GDP (Gross Domestic Product) itself. And that is what is stoking the flames of fear. Of course, there are several other nations that are dealing with the issue of debt, such as Spain, but the sheer amount of debt that the Irish are taking on is a lot more than most others.

The rising costs of budgetary support means that the Irish are eroding away their own wealth and with it the government is losing any fiscal flexibility they might have had in the short to medium term. Moody’s too is concerned about Ireland’s deteriorating debt affordability and downgraded Ireland for the second time in a year. The Irish banking system collapsed in 2008 and this meant taxpayers had to bear the burden of resurrecting the banking system after many of them ran aground in the face of a property bubble burst. With the economy still staggering towards a recovery, the resurrection of banks such as Anglo Irish have been a prickly issue but the Finance Ministry recently conceded that propping up these banks is directly tied in with international credit worthiness. Ironically, funds were being poured into the bailout to ensure international lending rates don’t go up. It might do so in any case.