View Full Version : So much for the virtues of austerity

12-17-2010, 01:25 PM
Ireland reacted swiftly when the 2008 Collapse occurred, shifting to immediate austerity. They have done and continue to do all the things the austerity/Austrian economic crowd says is the right way to fight off an economic downturn. This is their reward, from today's NYTimes:

Moody’s Slashes Ireland’s Credit Rating
BRUSSELS — Even as Europe’s leaders were praising the Irish government’s deficit-cutting efforts, the country received a dramatically different verdict Friday from a credit rating agency (http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_rating_agencies/index.html?inline=nyt-classifier): a steep downgrade and a warning of more to come.

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Jock Fistick/Bloomberg News

President Nicolas Sarkozy, of France, left, with Prime Minister Iveta Radicova, of Slovakia, and Chancellor Angela Merkel, of Germany, right, at the European Union summit meeting in Brussels, Friday.

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Thierry Charlier/Associated Press

Prime Minister Brian Cowen of Ireland is shown arriving at the E.U. summit meeting in Brussels on Friday.

Having pledged late Thursday to do “whatever is required” to contain the debt crisis and defend their embattled currency, European Union (http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_union/index.html?inline=nyt-org) leaders reconvened for the final day of a summit meeting. In the draft of a closing statement, the leaders welcomed the “impressive progress” in Dublin toward meeting the stiff conditions set for its recent bailout, including adoption of steep budget cuts.

Moody’s Investors Service (http://topics.nytimes.com/top/news/business/companies/moodys_corporation/index.html?inline=nyt-org) had a different assessment, however. It cut Ireland’s credit rating by five notches to Baa1, with a negative outlook, from Aa2 and said further downgrades could follow.

The downgrade represented a further blow for a county that has enacted deep austerity cuts — and it is likely to raise questions about whether the rating agencies are exacerbating the efforts of struggling euro countries to emerge from the crisis.

“In a way the ratings agencies are just playing catch-up with investor perceptions,” said Robin Marshall, director of investment at Smith & Williamson in London. “But it doesn’t help the downward spiral of debt.”
A number of institutional investors like pension funds are forced by internal rules to shift out of bonds when they are downgraded to a certain level. The biggest exodus would come if Ireland’s debt were relegated to below investment grade.

The Moody’s (http://topics.nytimes.com/top/news/business/companies/moodys_corporation/index.html?inline=nyt-org) rating for Ireland remains investment grade but if it were to move down by three more notches, it would be classified as junk, like that of Greece.

“The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected or the cost of stabilizing the banking system turn out to be higher than currently forecast,” Moody’s said in a statement.

The downgrade followed a similar move by another agency, Fitch (http://topics.nytimes.com/top/news/business/companies/fitch_ratings_inc/index.html?inline=nyt-org), last week. Standard & Poor’s (http://topics.nytimes.com/top/news/business/companies/standard_and_poors/index.html?inline=nyt-org) still has Ireland rated as A, the top band, but on review for a possible downgrade.

Just prior to its downgrade of Ireland, Moody’s said that it had put Greece’s Ba1 rating on review for a possible downgrade, citing uncertainty over the country’s ability to cut debt to sustainable levels.

Market reaction was mixed to the moves. The euro slipped $1.3222 Friday, from $1.3244 late Thursday. European stock indices were lower and the benchmark bond yields for most vulnerable countries in the zone edged up. The 10-year Irish yield surged 18 basis points to 8.3 percent.

European leaders were hoping to help calm markets by agreeing late Thursday to create a permanent support fund for the euro (http://topics.nytimes.com/top/reference/timestopics/subjects/c/currency/euro/index.html?inline=nyt-classifier) after 2013.

“We are ready to do everything that is necessary to ensure the financial stability of the euro area,” José Manuel Barroso (http://topics.nytimes.com/top/reference/timestopics/people/b/jose_manuel_barroso/index.html?inline=nyt-per), president of the European Commission (http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_commission/index.html?inline=nyt-org), said at a news briefing.

The draft declaration said that European leaders would ensure “the availability of adequate financial support” through their existing bailout fund of €440 billion, or $584 billion, a hint that they may be prepared to increase it if necessary.

With a bailout of Ireland recently completed, and concern that contagion will spread to Portugal and perhaps Spain, leaders have been divided on whether to increase the size of the fund, or to allow money from it to be used to buy government debt.

They also are far from agreement on longer-term financial issues, like whether to create common bonds backed by the entire euro zone.

Herman Van Rompuy (http://topics.nytimes.com/top/reference/timestopics/people/v/herman_van_rompuy/index.html?inline=nyt-per), president of the European Council, said that the leaders had not discussed increasing the value of the fund or making it more flexible, but had agreed more generally that they would “do whatever is required to ensure the stability of the euro.”

Leaders did agree on the creation of a bailout mechanism that would operate after 2013, when the mandate of the current €440 billion fund expires. Yet even here, vital questions on the size and scope of the fund were left until the spring.

For the first time, bondholders could be asked to shoulder some losses in future debt crises on a case-by-case basis, a measure that euro zone countries supported when they met several weeks ago to approve the bailout of Ireland and seek ways to support troubled economies in the future.
To set up this facility, the E.U. will have to revise its governing treaty, but it plans to do so in such a way as to avoid requiring referendums in any of the 27 member countries, all of which will have to ratify the revision.

At the meeting Thursday, Germany and Britain agreed to compromises on the future rescue fund. The German government modified its efforts to win a clear declaration that the fund would be used only as a last resort.

Britain, which has not adopted the euro, accepted assurances that it would not be required to take part in any future euro zone bailout funds set up under a catch-all clause in E.U. treaties intended to deal with emergencies.
One issue that had threatened to overshadow the meeting disappeared Thursday when the European Central Bank (http://topics.nytimes.com/top/reference/timestopics/organizations/e/european_central_bank/index.html?inline=nyt-org) said it had decided to nearly double its capital reserves.

In addition, the E.C.B. and the Bank of England (http://topics.nytimes.com/top/reference/timestopics/organizations/b/bank_of_england/index.html?inline=nyt-org) announced Friday the establishment a temporary swap line "to enable the E.C.B to provide liquidity in pounds to its counterparties." Under this, the Bank of England would provide the E.C.B. with pounds in exchange for euros up to a limit of £10 billion. The agreement expires on Sept. 30 next year.

No further details were provide in the statement but the arrangement appears aimed at providing Ireland's central bank with pounds to fund the obligations of the countries troubled lenders.

12-17-2010, 01:33 PM
Óglaigh na hÉireann (http://en.wikipedia.org/wiki/%C3%93glaigh_na_h%C3%89ireann)

Paul G.
12-17-2010, 02:06 PM
Ireland should default