S&P: AUSTERITY DOESN’T WORK IN EUROPE
24 August 2010 by Cullen Roche
11 Comments
S&P has cut Ireland’s sovereign debt rating to AA- from AA based on the continuing economic woes that have been magnified by their harsh austerity measures and foolish involvement in a single currency system:
- 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.
LONDON (Standard & Poor's) Aug. 24, 2010--Standard & Poor's Ratings Services said today that it lowered its long-term sovereign credit rating on the Republic of Ireland to 'AA-' from 'AA'. At the same time, the 'A-1+' short-term rating on the Republic was affirmed. The outlook is negative. The transfer and convertibility assessment remains 'AAA', as it is for all members of the European Economic and Monetary Union. The downgrade to 'AA-' applies to other ratings that are dependent on the sovereign credit rating on Ireland, including the issuer credit rating on the National Asset Management Agency (NAMA), and the senior unsecured debt ratings on government-guaranteed securities of Irish banks. "The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term," said Standard & Poor's credit analyst Trevor Cullinan. In light of the recent announcement of new capital injections into Anglo Irish Bank Corp. Ltd. (BBB/Watch Neg/A-2), our updated projections suggest that Ireland's net general government debt will rise toward 113% of GDP in 2012. This is more than 1.5x the median for the average of eurozone sovereigns, and well above the debt burdens we project for similarly rated eurozone sovereigns such as Belgium (98%; Kingdom of; AA+/Stable/A-1+) and Spain (65%; Kingdom of; AA/Negative/A-1+). After a decade of rapid credit growth, which in our view greatly increased the risk profile of Irish banks, the Irish government has adopted what we view as a proactive and transparent approach to dealing with the financial sector's difficulties. We believe this should help foster a gradual recovery of the Irish economy over the medium term. Nonetheless, we believe that the government's support of the banking sector represents a substantial and increasing fiscal burden, which in our view will be slow to unwind. We have increased our estimate of the cumulative total cost to the government of providing support to the banking sector from about $80 billion (50% of GDP; see "Ireland Rating Lowered To 'AA' On Potential Fiscal Cost Of Weakening Banking Sector Asset Quality; Outlook Negative," published June 8, 2009, on RatingsDirect), to $90 billion (58% of GDP). For details on how our 2010 estimate of Ireland's general government debt compares to official estimates, see Standard & Poor's commentary "Explaining Standard & Poor's Adjustments To Ireland's Public Debt Data," also published today. Our estimate includes two main components: the upper end of our estimate of the capital we expect to be provided by the Irish government to improve the solvency of financial institutions, and the liabilities we expect the government to incur in exchange for impaired loans acquired from the banks. We have increased our estimate of the cost to the Irish government of recapitalizing financial institutions to $45 billion-$50 billion (29%-32% of GDP) from $30 billion-$35 billion (19%-22% of GDP). "The negative outlook reflects our view that the rating could be lowered again if--as a result of its support for the financial sector or due to a more sluggish economic recovery--the government's fiscal performance improves more slowly than we currently assume," said Mr. Cullinan. Conversely, the outlook could be revised to stable if the Irish government looks more likely to achieve its fiscal target for the underlying general government deficit of less than 3% of GDP by 2014, or if the banking sector stabilizes more quickly and at a lower fiscal cost to the government than we now think likely.
Yes, let’s go back to profligacy.
Or just fix the flawed currency system….
Or just fix the flawed currency system…. TPC
Amen!
Ireland has the second largest GDP per Capita in the EU but not much to back that up. Correction is inevitable.
I can’t help but think how this coincides with Stiglitz comments published today. We seem to want Europe to do more deficit spending (stimulus), so we can as well.
Look, look, Austerity isn’t working, Ireland proves it, we all need to spend more.
I agree with slightly_skeptical. Look at the graph at bespoke investment group:
http://www.bespokeinvest.com/thinkbig/2010/8/24/an-awfully-bad-number.html
The stimuli couldn’t stop the decay. It is an undeniable fact. My view ist that due to excessive keynsianism in the past (especially 2003) demanders have a burn out syndrom and no stimulus can push them to real new demand. The new demand has to grow in a painful process over the next year from real economic development.
So I think that stimuli are not only wasted money but also counter-effective by incraesing the burn-out in demand. Nobody with a burn-out syndrome should be pushed with ampetamine or so.
BTW: Who cares about rating agencies? They are just financial journalists, who wrote incredible rubbish (AAA-Ratings) about financial junk constructions (CDO’s, … ) in the past. This is a proven fact. Only the extreme stupid poeple step into the same trap twice
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Was there ever a real stimulus in Europe? I only saw money going to banks and a few select industries.
At least in Germany there was a huge construction stimulus for renovation of schools, universities and streets. But now business climate, earnings, GDP-growth and employment are at pre-crisis levels.
S&P is really funny: They claim that austerity dosnt work, so that they can downgrade us like Ireland because of government debt. Very strange …
To say austerity is damaging Europe’s economy after just a few months is premature. In Europe as in the U.S. it took decades of deficit spending to cause the current day problems, and the problems caused by deficit spending are still manifesting themselves today. It will take years of financially responsible behavior and austerity to repair the damage done by deficit spending. After debt is decreased, you will see improvement in the economies.
After debt is decreased, you will see improvement in the economies. JH
“Debt” to the government backed counterfeiting cartel? We deserve our fate if we accept that debt as legitimate. In the Bible, even legitimate debt was to be forgiven every 7 years. That was long before bankers learned to use fractional reserves to create the boom-bust cycle we are plagued with.
We seem to want Europe to do more deficit spending (stimulus), so we can as well.
The Irish situation does make it clear that austerity — a path that Ireland has followed for quite some time — doesn’t necessarily fix anything, as many of the pro-austerity crowd suggests.
That being said, I don’t see how a small, high-wage, export-dependent economy like Ireland’s has much choice in the matter. Unlike the US, the Irish do have to worry about the possible implications of capital flight and the possibility that debt service costs could exceed their means.
For them, austerity may not be much of a cure, so much as it is their only option. They will need to have export markets prop them back up, and they can’t possibly stimulate enough domestically to either cause that to happen any sooner or else to make up for it.