Irish debt downgrade raises fears of international deflation spiral

The colossal expense of rescuing Ireland's troubled banking sector has hit the republic's international credit rating once again.

Despite an apparently successful austerity programme and drive to reduce government borrowing, Standard & Poor's yesterday cut its credit rating on Irish sovereign debt by one notch, from AA to AA-. It reflects renewed concerns about the cost to the public finances of supporting failed banks and building societies.

The news helped to push already unsettled international markets lower, as did disappointing news from the US real-estate sector, where new home sales dropped to an all-time low in July.

Irish government securities were marked sharply lower, in an uncomfortable echo of the sovereign debt crises that rocked the eurozone in May.

The additional premium that investors are demanding to hold Irish debt over its German equivalent soared to 346 basis points, the highest level for three months.

A statement from S&P read: "The projected fiscal cost to the Irish government of supporting the Irish financial sector has increased significantly above our prior estimates.

"We are therefore lowering our long-term sovereign credit rating on the Republic of Ireland to 'AA-' from 'AA'.

"The negative outlook reflects our view that a further downgrade is possible if the fiscal cost of supporting the banking sector rises further, or if other adverse economic developments weaken the government's ability to meet its medium-term fiscal objectives."

Specifically, S&P argues that the costs associated with Anglo Irish Bank will push Ireland's net national debt toward 113 per cent of GDP in 2012, well above the European norm.

S&P has increased its estimate of the cumulative total cost to the Irish government of providing support to the banking sector from about €80bn (£65bn) to €90bn.

The Irish authorities reacted angrily. John Corrigan, the chief executive of the National Treasury Management Agency, said: "It's a bit like waking up the patient in the middle of an operation to tell him he's not feeling well.

"We know the situation is pretty painful but we have to get to the end of the operation, which will be in December."

The Irish Treasury has refused to put a final price tag on its bank rescues before the year end, because the new state-owned "bad bank" will only then have completed its purchase of toxic assets from the financial sector. Markets are unhappy with that approach.

The S&P downgrade of Ireland to AA- levels the rating to the same as that of rival Fitch, and one lower than rival Moody's, which downgraded Ireland last month because of the growth outlook and public finances.

The danger – also faced by Spain and Greece – is that the very austerity programmes designed to solve the budget deficit may actually make matters worse by raising unemployment and depressing tax revenues, creating a vicious deflationary circle.

Critics of the UK's Coalition Government also point to these examples to illustrate the downside of deficit reduction. The IMF said in May that Ireland might have to make even deeper budget cuts if her growth is slower than anticipated.

A simultaneous international fiscal retrenchment, as now, adds to the dilemmas faced by governments.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee