Moody’s downgraded Ireland’s government bond ratings by one notch to Aa2 from Aa1. The credit research firm said: “The government’s gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability.”
Moody’s also said that a slowdown in the financial and real estate sectors were the primary reasons for Ireland’s trouble. The downgrade decision comes about a year after the fact and the information is almost certainly already priced into Ireland’s bondsMoody’s downgraded Portugal’s debt from AA2 to A1 on July 13. It said that the nation’s austerity measures were not sufficient to offset an economic expansion which barely had a pulse. Moody’s reasoned that Portugal’s deficit could not be managed with high national costs and falling treasury receipts. Analysts in the global capital markets had known those things for months. It is the reason the Portugal had to pay high interest rates on its sovereign debt.
Ironically, the Moody’s downgrades come at a time when the large institutions that trade in sovereign paper have become more confident in the region. The value of the euro has risen sharply in the last month to $1.2949 and there are signs that the improvement is not over. Financial support for the region’s economies, a series of funds worth nearly $1 trillion, have calmed the markets, as has a series of government spending cuts in Greece, Spain, Germany, and the UK. Most other countries in the region faced with large deficits will likely follow the same model.
The liquidity crisis in Europe is far from over. Bank “stress tests” for financial firms in the region may show up some weak balance sheets, but those are likely to be aided by central banks, meaning they are not fatal problems.
The credit ratings agencies, in this case Moody’s, have shown again that they are nearly useless in the analysis of sovereign risk because they make a great noise about things that the markets have known for a long time
Douglas A. McIntyre
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