In a follow up to The sovereign debt crisis is far from over. In fact, it is just beginning. and Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues., Moody’s may downgrade Ireland’s debt rating yet again. Marketwatch reports:
Ireland’s Aa2 credit rating is on review for possible downgrade, Moody’s Investors Service announced Tuesday, citing the rising cost of recapitalizing the nation’s crippled banking sector, as well as an uncertain domestic outlook and rising borrowing costs.
If Ireland’s rating is cut by Moody’s, it would “most likely” be by one notch, which would leave the nation with an A rating. The agency said it intends to complete the review within three months.
Hornung said the review will pay close attention to the government’s revised four-year fiscal plan, which is scheduled to be presented in early November. Ireland’s government has said it intends to bring its budget deficit down to less than 3% of gross domestic product — the European Union limit — by 2014.
In the second of those two posts, I had said that the bank bailout was a temporary stop-gap measure and that Ireland still has fiscal problems that need to be solved. At this point, there is no way to know if Ireland will develop a plan to bring down its budget deficit to 3% of GDP or if that is an empty promise. Additionally, there is no guarantee that such a plan would succeed.
Much depends on the economy. An economic recovery would certainly help Ireland achieve its goal, but another recession would make this virtually impossible. Moody’s is concerned about this situation, just as I am, and is prepared to downgrade Irish debt if the government’s plan disappoints.
People have this false assumption that since the sovereign debt crisis is no longer on the front page, the situation has been solved. Far from it. These at-risk countries still have huge deficits to contend with, even larger debts to maintain, high unemployment rates, and an angry population that is increasingly rioting in the streets. The problem is far from over and, I suspect, we will still be talking about it years from now.