A world in economic crisis

Ireland – Moody’s cut rating to junk bond status

Posted in Ireland, Moody's credit rating by Aussie on July 13, 2011

Once again we see the ratings agency Moody’s acting in a manner that is probably not in the best interest of a country in trouble. This time it is Ireland and Moody’s has taken the step of cutting its rating to junk bond status. This is devastating news for Ireland. The BBC News has the story on this subject:

 

Moody’s said its decision was based on the “growing possibility” that Ireland would need a second bail-out before it can return to capital markets.

The current European Union and International Monetary Fund support programme is due to end in late 2013.

It comes at a time when markets fear the debt crisis in the eurozone could spread to Italy and Spain.

Ireland, Greece and Portugal have all been downgraded by ratings agencies several times in recent months.

I think that I have to agree with the Greek Foreign Minister regarding the behaviour of the ratings agencies, because their decisions do impact severely on the ability of these nations to borrow, an ultimately to repay their debt. The change in status means that the interest charged on borrowings is raised to higher and higher levels. How does that help to repay the debt?

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Ireland–Moody’s cuts rating to just above junk bond status

The crisis in the Eurozone continues unabated. This time it is Ireland again. The credit rating agency Moody’s has cut its rating for the Government of Ireland to one rung above junk level.

The reason given for the cut in the credit rating is due to the weaker than expected economic growth. It is a decision that will hurt the Irish government as it struggles to impose austerity measures to help bring the country’s debt under control.

The cut in the credit rating also means that the Irish Government will have to pay more in interest for its debt raisings. This is a very bitter pill that it must swallow. Ireland cannot afford the increase in borrowing costs. Not only does it raise the cost of borrowing but with a rating just above junk level, it will actually mean that it will be harder to attract investors willing to purchase Irish government bonds.

Although I am not qualified to analyse the whole situation, I can at least speculate that until the Irish Government decides to change in regard to socialist policies aka the welfare state, then it will probably continue to struggle in this way.

It seems that the austerity measures that have been undertaken do not go far enough in changing the structural economic problems in Ireland. It will require not just the austerity measures that have already been undertaken, but a rethink on the welfare state.

Socialism is a failing system. In the long run it leads to economic decline. The economic pie is limited. If government is taking more than half of the pie then eventually there will be a point where the remaining few who are paying taxes will be unable to continue. Has Ireland reached that point? What about Greece?

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