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News : Irish Economy Last Updated: Aug 25, 2010 - 8:27:42 AM

Ireland will be paying 10% of tax revenues in 2011 to service the national debt
By Finfacts Team
Aug 24, 2010 - 6:16:41 AM

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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.

The agency 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 unprecedented scale.

"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 years.

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 period.

The program was launched in May as part of the European response to the sovereign debt crisis.

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