Ireland records biggest deficit in euro zone

Ireland's deficit climbed to the highest in the euro zone after the EU reclassified the €4 billion injection into Anglo Irish Bank as Government spending.

The move brought the deficit to 14.3 per cent of gross domestic product (GDP) in 2009, more than four times the EU's 3 per cent deficit limit. Greece had a gap of 13.6 per cent of gross domestic product, rather than 12.7 per cent as reported earlier, Eurostat said.

The spread between Irish bonds and the German bund widened to 169 basis points after the news, from 151 yesterday.

"I don't think the news is shock horror," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. "It doesn't make us look any better."

The EU had forecast a shortfall of 12.5 per cent in November. However, Minister for Finance Brian Lenihan said it was a "once off impact".

"While the headline deficit for 2009 is 14.3 per cent of GDP, as a result of a technical reclassification associated with Government support provided to the banking sector, it is important to note that the underlying 2009 general Government deficit for Ireland is 11.8 per cent of GDP, which is broadly similar to that projected in December's budget," Mr Lenihan said.

"This is a once-off impact, and will not affect the Government's stated budgetary aim of reducing the deficit to below 3 per cent of GDP by 2014."

Chief executive of the National Treasury Management Agency (NTMA) John Corrigan told an Oireachtas committee that the reclassification of the deficit is a "technical issue" and has no implications for borrowing.

He said there's a "reasonable prospect" international ratings agencies will move their outlook on Ireland to stable from negative and said the country is entering "calmer waters." Ireland is rated AA1 at Moody's Investors Service and AA at Standard and Poor's, and both have "negative" outlooks on the nation's debt. Fitch has an AA- rating on Ireland, with a "stable" outlook.

"Sentiment towards Ireland as reflected by bond yields has improved," Mr Corrigan said.

Mr Corrigan said the debt agency plans to gradually reduce its cash balances which have been around €20 billion, by cutting the volume of short-term paper in issue.

The Government last month said Anglo Irish may need €18.3 billion in additional capital. It has also pumped money into Bank of Ireland and AIB.

Mr Corrigan said the Government would probably take a stake in Allied Irish Banks Plc as part of a payments-in- kind arrangement after the European Commission halted coupon payments by the bank.

Ireland's debt increased to 64 per cent of GDP last year from 43.9 per cent in 2008, the statistics office said.

Labour Party spokeswoman on finance Joan Burton said the figures corrected the Government's calculations.

"The government describes the upward revision of Ireland's deficit from 11.8 per cent to 14.3 per cent of GDP as merely technical re-classification of the 2009 general government deficit. This is a breathtaking attempt to airbrush out of economic history the financial consequences of the €4bn injection into Anglo Irish Bank," she said.

"From being one of the least indebted countries in Europe, Ireland is now well on its way to being one of the most indebted, especially when the impending mass issue of Nama bonds is factored into the equation."

Fine Gael's finance spokesman said the impact of today's news was "very serious".

"It means that if the Government is to meet its 3 per cent budget deficit figure by 2014, as agreed with the European Commission, it will have to find significant additional savings," he said.

"With an estimated €21 billion to be pumped into Anglo and INBS over the next ten years the Government will have to find an average of €2 billion in extra savings each year for the next four years just to meet their own targets. To put that into context, the total savings made last year from public sector pay cuts was just over €1 billion."

In the euro area, the budget deficit widened to 6.3 per cent of GDP last year, the biggest since the introduction of the euro in 1999, from 2 per cent in 2008. Overall debt was at 78.7 per cent.

Additional reporting: Agencies