It May Not Matter That Moody's Cut Ireland Debt

Capital markets investors may say that the downgrade by Moody’s of Ireland’s debt by a full five notches does not matter much now. The Ireland government has put its austerity measures in place. The rescue package created by other nations in the region is set. Irish paper was sold during the recent crisis. The investor money may have returned in part now that Ireland seems to be a safer investment. Ireland, though, does not have much of a financial safety net.

The Moody’s action, in other words, came after most of the key facts about Ireland’s problems were already known, which don’t mean much to investors now.

Moody’s comments on Ireland’s future present the important question of whether rescue efforts will last long enough. Ireland may not be able to pay off the loans it has received. A similar set of concerns have been raised about Greek debt. Aid helped the nation from insolvency, but the day of reckoning will return in two years when the southern European nation has to refinance is sovereign paper again.

The rating agency commented: “Moody’s Investors Service has today downgraded Ireland’s foreign and local-currency government bond ratings by five notches to Baa1 from Aa2. The outlook on the Baa1 rating is negative.”

1. the crystallization of bank related contingent liabilities;

2. the increased uncertainty regarding the country’s economic outlook: and

3. the decline in the Irish government’s financial strength.

Ireland’s economic outlook is not only uncertain. It is grim. Ireland and the weaker nations in the region have no reason to believe that the key parts of their economies will change, even if they say otherwise.  Its housing markets are in shambles. Unemployment is near record levels. Exports are not going to recover. Bank balance sheets will be ravaged more by home prices and defaults on loans that they have outstanding. Who would disagree that Ireland looks like Greece which looks like Portugal and Spain?

Ireland has made the case that austerity is sufficient. Spain, which may be the next country to ask for aid, makes the same claim. Austerity, however, has not been tested. At least not at the level which has been put into place by several countries in the region. Reduced spending and higher taxes may send economies into a flat spin. There is not economic model that can absolutely prove otherwise.

Investors say that the Moody’s, S&P, and Fitch warnings about European sovereign debt come too late. That is so until the capital markets read the fine  print. The financial crisis in the region is going to get worse.

Douglas A. McIntyre