Ireland's Apocalyptic Gloom

From Bloomberg:

Fitch Downgrades Ireland's Rating on Cost of Banking Bailout

Fitch Ratings lowered Ireland’s credit grade to the lowest of any of the major rating companies and said there’s a risk of a further reduction.

Ireland was cut to A+ from AA-, reflecting the “exceptional and greater-than-expected cost” of the nation’s bailout of its banking system, Fitch said in a statement today.

The move comes a day after Moody’s Investors Service said it may cut the country’s rating. Ireland may have to spend as much as 50 billion euros ($69 billion) to repair its financial system, pushing the budget deficit this year to 32 percent of gross domestic product. Fitch said the rating could be lowered again if the economy stagnates and political support for budgetary consolidation weakens.

Ireland is at the lowest point, it shouldn’t get any worse,” Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin, said in a phone interview. “We’re not funding at the moment. We’re in a comfortable situation.”

Ireland’s government last month canceled bond auctions in October and November, saying the state is fully funded through the first half of 2011. Ireland has an Aa2 rating at Moody’s and AA- at Standard & Poor’s.

Irish consumer confidence plunged the most in more than four years last month due to the mounting burden of bailing out Anglo Irish and the surge in sovereign borrowing costs.

“Ireland has experienced a great panic,” said Austin Hughes, chief economist at KBC Ireland. There is a “risk that a sense of apocalyptic gloom may trigger a freeze in spending.


Ireland's gigantic mess keeps growing larger.

It is about to become the next Iceland.

 The sovereign debt of Ireland has grown from 44% of GDP in 2008 to 64% in 2009 to 96%  (by my estimate) in 2010.

Compounding Ireland's crisis is its participation in the Euro.  It has lost its ability for self-determination with its own sovereign currency.
The solution - delay bond auctions rather than pay high yield rates. 

The bailout of Anglo Irish will likely cost them EU membership and enforce severe austerity on the middle class.

The immediate effect of this decision is deflationary, as the velocity of money (in Euros) rapidly drops.

Further, once bailed-out, Anglo Irish could well become a zombie bank requiring even more capital in the future.

In my view, we will see Ireland suffer in a similar manner to the Icelandic experience within the next year.