Outlook What can Ireland do to end the cycle of bad news? Last year, the Irish government risked social unrest with a series of austerity budgets ushering in swingeing spending cuts. They were not enough to reassure the bond markets, with investors spending much of this summer fretting about the mounting cost of bailing out Irish banks. In response, the government unveiled a new plan last week, based on worst-case scenarios, to tackle that crisis. It was praised by banking experts as realistic and achievable (though very unpleasant). But that wasn't enough to appease the credit rating agencies. Fitch cut its rating of Irish sovereign debt yesterday, while Moody's is considering following suit.
The latest downgrades will mean higher interest costs, exacerbating Ireland's public finance woes and further damaging confidence. Consumer spending has already begun to slump, data published yesterday revealed.
This is not a saga we should ignore in the UK. Mr Osborne says he wants to cut debt to ensure the cost of borrowing does not rise as confidence in our ability to repay declines. And, so far under his Chancellorship, interest rates have been falling, just as they initially did following Ireland's austerity budget.
What happened there, however, was that the progress reversed because the slowdown caused by the austerity further damaged the banking sector and the public finances. Do not assume that the British experience will automatically turn out differently.