Central Bank and Financial Services Authority of Ireland headquarters, DublinLast year, we learned what happens when a small island in Europe filled with people who talk funny bets the farm on the financial services industry. Are the Irish next?
Lovely emerald Eire, the European economic miracle of the last few decades, has run into some hard times. GDP is down almost 10% this year, while the country's debt is projected to soar by the end of next year to actually exceed GDP. And now, the indignity of a credit rating cut.
Never averse to kicking when the opponent is down, Fitch Ratings has slashed Ireland's creditworthiness by two whole grades, to double-A-minus, whatever the hell that means. The other two ratings agencies may join in beating a dead Celtic Tiger, as both Moody's Investors Service and Standard & Poor's have a negative outlook on Ireland.
Ireland lost its coveted triple-A rating in April.
"As recently as the end of 2007, gross government debt was just 25% of GDP," Fitch explained. "The rise in debt is likely to push the ratio of debt interest payments to revenue above 15%, one of the highest among Fitch-rated sovereigns in the 'AA' range, reducing fiscal flexibility."
Is Ireland going the way of Iceland? Will Dublin be little more than a smoldering mass of ruins and a shantytown by Christmas? Will a weird pixie singer account for three-quarters of its GDP next year? Not exactly, Fitch (disappointingly?) says.
Despite kicking the country in the groin, Fitch says Ireland's outlook is stable. In particular, unlike Iceland, whose banking industry went into freefall, Ireland's is likely to be saved.
"The agency notes the vigor of the government's fiscal consolidation response to date, the expectation of further aggressive budget tightening and the likely success of the National Asset Management Agency in rehabilitating the banking sector," Fitch director Chris Pryce said.
Fitch downgrades Irish credit rating for second time [MarketWatch]
Ireland says Fitch cut shows need to slash deficit [Reuters]