Debt to take 10% of taxes, says ratings agency

BY 2011, one euro in every 10 raised in taxes in Ireland will go on servicing the national debt, according to Moody’s Investor Services, the credit rating agency.

Among the 16 euro-zone countries, the ratio is expected to be higher only in Greece and Italy.

The figure was revealed in Moody’s bi-annual report, European Sovereign Outlook published yesterday. It provides an overview of the agency’s assessment of the creditworthiness of the continent’s governments.

Moody’s reaffirmed its Aa2 rating for Ireland, stating that the country’s “proven adjustment capability and its economic vitality” should allow it to stabilise public debt, albeit at a high level. Ireland shares an Aa2 rating, which is two notches below the top-rated Aaa (triple-A) level, with Italy and Slovenia.

Moody’s believes that the size of the budgetary adjustment needed in Ireland is the largest of any economy in Europe.

The agency stated that it will conclude its reassessment of Spain’s rating by the end of September. Should it decide to strip the euro zone’s fourth-largest economy of its triple-A rating, the costs of borrowing for Spain would almost certainly rise considerably.

A downgrade could also add to the ongoing nervousness in the government bond market. Recent bouts of jitters have resulted in all fiscally weak countries, including Ireland, paying higher interest rates. The timing of past ratings agencies’ downgrades has been subject to criticism as they have sometimes exacerbated market panics.

Separately, the European Central Bank (ECB) revealed yesterday that it purchased €338 million worth of government bonds last week, bolstering recent market talk it had ramped up purchases of Irish bonds. The ECB does not disclose details of its sovereign bond purchases.

This was the largest weekly intervention since early July – well in excess of the level around €10 million in recent weeks – although it remains a fraction of the purchase sizes in May when the emergency measure was first introduced. The purchase of government bonds by central banks, which is highly unorthodox, is designed to support bond prices and lower the cost of raising debt.

It follows recent comments by market participants that the ECB bought €60 million of 2012 Irish government bonds just over a week ago, after spreads over German Bunds ballooned.

“We have seen some signs of tensions again, particularly in the case of Irish bonds, and the increase in the purchases reflects that,” said BNP Paribas economist Ken Wattret. “It looks like the ECB stands ready to intervene whenever needed, but with the amounts we are seeing at the moment we are only talking about small potatoes really,” he added. – (Additional reporting: Reuters)