Moody's cut Irish debt rating as deficit climbs

RATINGS AGENCY Moody’s has cut the Republic’s credit rating and said the State faces a heavy debt burden for years to come.

The downgrade came as new Department of Finance figures showed the exchequer deficit had grown to €14.7 billion for the first six months, an increase of €9 billion over the past year.

The expansion in borrowing, attributable partly to €6 billion in payments to bail out the banks, came as declines in tax revenues showed some signs of stabilising.

While down 17.3 per cent on the same point of 2008 at €15.8 billion, tax revenues came in close to the expectations of the Department of Finance for this stage of the year. This compared to an annual drop of 21 per cent a month ago.

A breakdown of the receipts showed that a change in timing for corporation tax payments boosted the numbers, along with some companies paying more than had been expected. Excise receipts were €81 million higher than the department had anticipated.

Alongside this, VAT payments were €202 million behind expectations, while income tax revenues were €113 million behind target. Overall receipts were €118 million, or 1.2 per cent below expectations.

Minister for Finance Brian Lenihan was keen to point out that the rate of decline in tax receipts had “eased”, but the figures would have to be tightly monitored

He said the Government’s spending targets for the year remained “valid” after the mid-year figures showed a €530 million shortfall on forecast expenditure for the end of June.

The overall exchequer figures showed that the “difficult but necessary decisions” taken in April’s supplementary budget were making some impact.

Moody’s, the last of the three main agencies to reduce their Irish rating, yesterday said it is applying just a “moderate” cut in the Republic’s credit rating in light of the “decisiveness” of the Government’s response to the crisis.

“We think the framework is credible,” said Dietmar Hornung, the Moody’s analyst who oversaw the rating decision.

The agency has cut the Republic’s rating from AAA to AA1, and said the outlook for future ratings was “negative”.

Moody’s raised concerns about the State’s ability to afford its debt burden and to pay for raising new debt. The agency also pointed to problems with paying back debt “in a non-supportive global environment”. The ability to repay would hinge on the Government’s “capacity to adjust both in economic and fiscal terms”. Specifically, Moody’s said the Government needed to restore competitiveness by cutting wages.

Mr Hornung said “the country is set to emerge from the current economic crisis with a considerably higher debt burden for the foreseeable future”. The State’s weakened financial condition had been “further aggravated by liabilities arising from the recapitalisation of troubled banks”.

The key drivers behind the rate cut were, “affordability, financeability and reversibility”, Mr Hornung said. This means the agency looked at the share of revenues the Government will need to use to pay back debt, the likely cost of future debt and the State’s “ability to reverse the negative debt dynamics”.

The negative outlook reflects Moody’s view that affordability, financeability and reversibility could all deteriorate in the future.

Moody’s said it would monitor the Government’s plans for “fiscal consolidation”.

“A meaningful fiscal adjustment will require an additional structural improvement of Ireland’s primary budget balance,” said Mr Hornung.