Moody’s May Downgrade Ireland, Again

Moody’s Investors Service placed Ireland’s Aa2 local currency and foreign currency government bond ratings on review for a possible downgrade. That means that global capital markets investors will force the nation to pay much higher interest rates on its sovereign paper. Those rates are already high compared to those paid by France and Germany.

Moody’s voiced concern about Ireland’s growth rate and its ability to support its own bank system. “The Irish government has announced a series of additional recapitalisation measures that are likely to raise the government’s total cost for bank support by EUR 10-15 billion. These measures will lead to a substantial rise in Ireland’s general government deficit to around 32% of GDP this year.”

The irony of the cut is that it is also based on Ireland’s high borrowing costs, and those borrowing costs will further erode Ireland’s ability to handle debt coverage and the payment of principal. “Elevated borrowing costs. Ireland’s borrowing costs have increased considerably since July. In light of these elevated borrowing costs, the interest burden stemming from Ireland’s growing debt stock is set to increase significantly in the coming years should interest rates remain at current levels.”

Ireland now joins nations like the UK, Spain, and Greece in the race to bring down national government spending. Like it or not, this almost always leads to higher taxes. Irish politicians, at least those in power now, insist that there is no need to raise taxes, but have no explanation of how deficits will be cut and troubled banks will be supported otherwise.

Ireland intransigence on the tax matter only pushes it day of reckoning into the future when the need to raise those taxes has become much more dire. There is no point in trying to trick Ireland’s citizens now. They will bear a much greater burden to support their government and banks. Otherwise, they can go beg for money from the IMF and neighboring nations which will force austerity on them.

Douglas A. McIntyre