Economics 02/07/2009: Downgrade on Irish debt

Moody’s downgraded Ireland from top Aaa government-bond ratings one notch to Aa1 (hat tip to PMD) saying that Ireland’s policy response to the economic downturn had been decisive and the government had a strong balance sheet before the crisis struck, so there was only a need for a moderate downgrade. The ratings were on watch for possible reduction since April. So the move was widely expected.

“The review process focused on the nature of the policy response and the extent to which the Irish economic model was durably affected by a sudden and brutal economic and financial adjustment,” said Moody’s Sovereign Risk Group analyst.

Despite politically correct chatter about ‘decisive response’ etc, Moody’s still has a negative outlook on Irish ratings. Why? Risk of further deterioration in terms of debt affordability (as measured by the share of government revenue used for interest payments) and financeability (the cost at which the country can raise more debt).

Per WSJ report, the ratings agency said debt dynamics will remain unfavorable for the country for several years, and that downside risks outweigh upside risks in the near to medium term.