Moody’s Downgrades Ireland, And With It All Of Europe

Moody’s downgraded Ireland’s sovereign paper from Baa1 to Baa3. That is two notches and the credit rating agency also said its outlook on the debt was still negative. The downgrade was deserved and shocked no one. Moody’s said its concern about the recovery of Ireland’s economy was at the core of its decision. So was the “uncertainty created by the solvency test required by the European Stabilization Mechanism.”

Moody’s will probably downgrade Ireland again along with Portugal, and Greece. The reasons are all identical. Austerity breeds slow growth and unemployment.  Slow growth undermines GDP improvement. Sluggish GDP makes it harder for troubled nations to pay debt. The trouble makes it likely that the debtor nations will have to pay higher interest rates.

There was a great deal of conversation recently about an eventual restructuring of Greece’s debt. IMF Managing Director Dominique Strauss- Kahn countered this sentiment by reasserting his faith that the Greek austerity and tax model would allow it to muddle through its debt and deficit crisis. No one in authority spoke out with him, probably because no one of authority agrees with his statement.

A downgrade of Ireland is a downgrade of the euro and the EU. Each time one of the credit rating agencies loses more faith in the sovereign debt of a weak country in the region, it makes the cost, both monetary and politically, of the rescues rise higher. Capital markets investors are growing increasingly worried that the IMF and EU will be unable to handle the region’s debt crisis. Each time there is another downgrade Germans wonder why they are putting money into a fundamentally insolvent system.

And, the system is now fundamentally insolvent.

Douglas A. McIntyre