Ireland will be paying 10% of tax revenues in 2011 to service the national
debt, according to Moody’s Investor Services, the credit rating agency.
Ireland like Greece is dependent on foreign lenders to fund its national debt
- - the National Treasury Management Agency (NTMA) said last month that the
ratio is 80% - - and in its bi-annual report, European Sovereign Outlook,
published on Monday, Moody's said that in the Eurozone , the ratio of Irish tax
receipts that will go to debt servicing, will only be outranked by Greece and
Italy in 2011.
The agency said it was maintaining Ireland's Aa2 rating, saying that the
economy's “proven adjustment capability and its economic vitality” should
allow it to stabilise public debt, even though at a high level. The Aa2 rating,
which is two notches below the top-rated Aaa level, is shared with Italy and Slovenia.
Moody’s said that the size of the budgetary adjustment
required in Ireland is the largest of any economy in Europe.
Moody's also warned that European governments risk
compounding their economic problems by cutting
spending too quickly.
said while public fiscal adjustments are
necessary, it warned that "given the magnitude of
the fiscal challenge and the need to sustain tight
fiscal policy for several years, we conclude that
the risks to economic growth are clearly to the
downside." It said dealing with weak growth
is Europe's biggest challenge.
The rating agency said government cutbacks will
slash consumption spending across Europe in coming
years, as belt-tightening takes place on an
"Never before in modern history have so many
countries attempted to undertake such large fiscal
adjustments simultaneously," Moody's said. "In the
next six-nine months at least, the impact on growth
is likely to be negative."
Moody's said the key to a successful response, is to pair lasting spending cuts with reforms in
labour markets, tax policy and entitlements such as
health care and retirement programs. It said a look
at history shows large adjustments tend to work
better than smaller ones, and that cutting spending
impresses markets more than raising taxes. "We will closely monitor whether the
adjustment paths taken by governments have the
potential to be growth-enhancing, thereby
facilitating the social acceptance of the
substantial fiscal pain that is to come and
increasing the likelihood that the fiscal
adjustment will be durable and successful. The
ratings of countries that follow this path are
more likely to remain at their currently high
levels. Recent actions by several Eurozone
governments are encouraging, as they reflect a
stronger focus on expenditure cuts, compared
with fiscal actions within 2010 budgets that had
been centered more on the "low hanging fruit" of
tax rises and cuts in public investment."
Moody's also said that the massive amounts of
debt on consumer and government balance sheets will
complicate any recovery, making slow growth "the
greatest challenge facing Europe" in coming
The agency said: "Credit grew very quickly in most countries
during 2002-07, and banks, companies and
households are now beginning to deleverage and
pay down their debt, either willingly or out of
necessity. History tells us that deleveraging
episodes following financial crises are usually
particularly difficult, causing economic
stagnation and weakening government revenues. In
Japan, for example, government revenues in
nominal terms are still below the levels they
achieved 20 years ago."
Meanwhile, following reports last
week, that the European Central Bank was buying Irish government bonds on the
market, to reduce the then widening interest rate spreads with benchmark German
bunds, the ECB confirmed on Monday that its purchase value last week, was the
biggest in six weeks.
The central bank said it bought
€338ms of bonds in the 15th week of its program, up from €10m over the previous
The program was launched in May as
part of the European response to the sovereign debt crisis.