Ireland Suffers Credit Rating Downgrade

Friday, 8 October 2010

Sovereign debtors are supposed to be the most reliable in the world. However, given the horrendous financial crisis suffered by many countries over the last 2 years, sovereign finances have largely been left to wither. Case in point - Ireland.

The Irish economy has weathered particularly badly.  To illustrate just how bad things have become, we look to the Eurozone criteria for a country participating in the monetary union. These laws specify a specific level that represents the maximum overall debt that a country can be in at any one time (debt to foreign financiers). There are also rules surrounding the percentage deficit that a country can run.

Comparing these participation requirements with the current state of the Irish economy, you'll soon see the degree to which the nation is in trouble. At present national debt is 32% of GDP, which is over 10 times the accepted limit in Eurozone countries.

The consequences of this are dire, not only for Ireland - but also for the Eurozone as a whole. Because Ireland is already signed up to the monetary union, all member countries are required to help each other out in times of need. Obviously, this is in the best interests of the Eurozone as a whole - because the failure of a single country has the potential to significantly affect the finances of the entire region.

We have already seen this taking place. Germany, France, and even the UK to an extent have all helped Ireland (and Portugal, Greece, and Spain) out to a certain extent. They have provided back up funds to assist in the restructuring of debt - across the sovereign landscape.

So far, it doesn't seem to be working as planned. More and more money is now required to keep these rogue countries on track - and the patience of the likes of Germany is running out.

So is the patience of the ratings agencies. As noted in the title, Standard and Poors recently downgraded Ireland from an A+ nation to an AA- nation, which has huge implications for the finances of the country. Debt financing will become more expensive, stock markets will find it more difficult to encourage investors, and it will be even more difficult than before to finance and recover the budget deficit.

For Ireland, it's a long road ahead. No doubt there will be much discussion around the viability of the continuance of the Eurozone - but we will save that for another day.