By: Dr. Mike Campbell
The Irish financial system was devastated by the global financial crisis and needed a public bailout to ensure that it did not experience a cataclysmic failure which would have had dire consequences for Ireland and would likely have plunged the rest of the Eurozone into crisis.
Much of the prosperity that Ireland enjoyed in the 1990s, and earlier this century, was spun-off a property boom which was supported by huge (and as it turned out, foolish) lending from the banks. When the property bubble burst, borrowers were left unable to repay their debts and the Irish financial system was left in crisis.
The financial disaster was averted and the banking sector has survived, but the exercise has left the Irish tax payer with a huge bill to pick up. The current estimate for the rescue is at the €45 billion mark; twice the value originally estimated.
The debt will work out to be 32% of the country’s gross domestic product – more than ten times the level permitted under Eurozone rules. The Irish GDP has shrunk significantly since 2008 and, consequently, government tax revenues have also fallen back sharply.
As a consequence of the current situation, Fitch’s ratings agency has decided to downgrade Ireland’s credit status to A+ from AA- (meaning that they perceive that the risk of the Irish defaulting on their government bonds has risen and that they are a lower grade investment than before).
This is the second downgrade that Fitch has made on Irish debt this year. Moody’s, another major ratings agency, hinted that it may follow suit. The consequence for this for Ireland is that they will probably have to offer better interest on their bond issues to attract investors, making it more costly for the nation to service its debts.