Already reeling from its reluctant request for a European Union (EU) bailout, the bad news kept coming for Ireland Tuesday. Just days after being downgraded by Standard & Poor's and receiving strong hints that Moody's Investment Services would soon do the same, Fitch Ratings slashed Ireland's long-term foreign and local currency default ratings by three notches because of the banking crisis, all while giving the republic a virtual pat on the back for its overall "strong underlying fundamentals."
Fitch, which already lowered Ireland's rating on October 6, again cut its outlook for the struggling European nation largely on the ongoing need to support the crumbling banking system, left in wreckage after risky bets on long-term real estate sector strength, and the cost of restructuring following its agreement to take money from the EU and International Monetary Fund (IMF). Fitch noted the following:
"The downgrade reflects the additional fiscal costs of restructuring and supporting the banking system, reflecting ongoing contingent liabilities arising from the guarantee of Irish bank debt and deposits (equivalent to 93.5% of GDP at end-3Q2010); weaker prospects and greater uncertainty regarding the economic outlook as a result of the recent intensification of the financial crisis; and the associated loss of access to market funding at an affordable cost, resulting in reduced fiscal financing flexibility. The scale and pace of the deterioration of public finances, continuing contingent fiscal and macro-financial risks emanating from the banking sector, combined with the highly uncertain economic outlook and loss of market access, means that Ireland's sovereign credit profile is no longer consistent with a high investment grade rating. Ireland's continued investment grade status is underpinned by the EU-IMF external support, as well as the Irish government's demonstrated commitment to fiscal consolidation and still strong underlying economic fundamentals. The structural budget deficit, which is estimated by the IMF to be equivalent to 8.6% of GDP in 2010, is the largest in the Euro Area and of any Fitch-rated sovereign in the single 'A' and 'BBB' rating categories."
Fitch's later explanation for its "strong fundamentals" assessment included assertions of a diversified and 'investment-friendly' economy as well as its modern history of debt service and social stability. The ratings agency did, however, intimate the downgrade likely would be Ireland's last for the forseeable future.
The EU confirmed it will send a total of about 67.5 billion Euros to Ireland, which is choking on debt from the real estate and banking busts, starting with an immediate 10 billion Euro infusion. The EU is mandating the nation bring its annual deficits below 3% of its total gross domestic product by 2015 and are forcing the Irish to dip into the national pension fund to alleviate some immediate financial problems, an unprecedented move in Europe.
Ireland's Prime Minister Brian Cowan, after months of putting on a brave public face that the nation would not need assistance, committed to the bailout and a four-year austerity plan to reduce its swelling budget deficit. Earlier this year, Ireland's credit rating was downgraded significantly by both Moody's Investment Services and Standard & Poor's on debt fears. Cowen was among those who mocked the ratings moves, not to mention the agencies themselves, flawed and inaccurate.
Moody's Analytics Economist Melanie Bowler recently told NACM that Ireland's acceptance of the bailout after much foot-dragging likely would help European banks regain some confidence, at least in the short-term, However, it also almost assuredly will impede the prospects for any kind of Irish rebound and longer-term growth in the near future. As such, multinational companies, fearing the impact of undoubtedly higher taxes "may start to look elsewhere" to operate, she speculated.
Brian Shappell, NACM staff writer