THE LAST thing a busy Taoiseach engaged on an important trade mission abroad needs is to have to deny remarks that he never made at home when they are wrong and deeply damaging for Ireland and the euro. In Tokyo yesterday, Mr Cowen, through no fault of his own, found himself in that embarrassing position. He had to reject an inaccurate report which claimed that during last week’s talks with the social partners, he had said the International Monetary Fund could be called in if economic conditions deteriorated. His alleged remarks were picked up by other media outlets and by currency traders on financial markets. The result was a fall in the value of the euro against the dollar.
The euro stabilised after Mr Cowen’s emphatic denial was followed by the confirmation by Dan Murphy, general secretary of the Public Service Executive Union, that the IMF was never mentioned in discussions with the social partners. IMF involvement was something that he, Mr Murphy, felt could happen. It was merely his opinion.
This unfortunate misunderstanding about Mr Cowen’s remarks could hardly have come at a less opportune time for the Government or for the economy. The ratings agency Standard Poor’s (SP) last week warned that it may cut Ireland’s triple-A rating for its sovereign debt due to the sharp deterioration in the public finances. This warning of a credit downgrade was followed up some days later by the agency issuing similar warnings to Spain, Greece and Portugal. SP downgraded Greece’s sovereign debt yesterday, citing declining competitiveness and a rising fiscal deficit as reasons. For the euro zone bloc this is a serious development. It puts the currency under pressure. It will also raise investor concerns about the euro’s future, prompt market speculation and generate currency volatility. Moody’s became the third agency to talk of reviewing Ireland’s rating yesterday. What is now emerging within the euro zone is a deep divide between the stronger and weaker economies. That difference is most evident in the much higher yields on the bonds that Ireland, Spain and others must offer to sell government debt, as their borrowing needs soar and their economies decline. Twelve months ago, Ireland could finance its borrowing at close to the German rate for 10-year bonds. Today, Ireland is forced to pay investors a far higher price, which means higher borrowing costs. Earlier this week the gap in yield – or interest rate – between the German benchmark rate and that of eight other euro-zone countries, including Ireland, reached record levels. Investors are demanding a higher yield to cover a greater perceived default risk by some of the weaker euro-zone economies.
When countries adopted the euro that was seen as an irreversible commitment by members of the currency union. However, with three of the euro-zone economies in receipt of warnings of a credit rating downgrade, and with Greece’s credit rating cut, new uncertainties surround the euro. For Ireland, the most immediate challenge is to avoid a credit downgrade. And that requires the Government to take speedy and resolute action.