THE REPUBLIC needed a “credible framework” to deal with the challenges posed to public finances by the recession, according to an analyst with the agency which cut the State’s credit rating this week.
On Monday, Standard&Poor’s (S&P) cut its rating of the Republic’s ability to repay its debts from “AAA” to “AA+”, a move which could increase the interest rates that the State will have to pay on exchequer borrowing.
The report, written by S&P analysts Trevor Cullinan and Frank Gill, stated the agency was concerned that a “credible multi-year strategy will not emerge until after the next general elections, due by 2012”.
Speaking to The Irish Timesyesterday, Mr Gill said that the key issue for the Republic is that "there needs to be a credible plan for dealing with the public finances. It does not matter who puts that plan in place."
He argued that, as gross domestic product (GDP) – the amount of wealth generated by the economy – is contracting severely, the ratio of the State’s debts relative to GDP will increase.
Mr Gill also pointed out that debt owed by households and businesses comes to 280 per cent of GDP, which will in turn act as a drag on growth. He said that, as households faced difficulty in repaying loans, it could further hit the value and quality of the banks’ assets. “I think what the Government has done so far has been impressive, but the economy is under such pressure that it is going to contract severely, which means that they face an enormous challenge,” he said.
Mr Gill warned that the weakness of both sterling and the dollar could hamper any potential export growth which might result from a pick-up in the world economy next year. He also said that it was not possible to predict whether multinationals would continue to invest in the Republic at the rate at which they have done in the past, something that was key to economic growth in the 1990s and the early part of this decade.
S&P’s move was broadly expected, but its decision came a week before the Government’s planned emergency budget. Falling tax revenues mean that Minister for Finance Brian Lenihan has to bridge a €24 billion gap between income and spending.
Mr Gill indicated yesterday that he agreed with the dual approach of tax increases and spending cutbacks. “They have to do something at the revenue side and they have to do something at the expenditure side,” he said.
Reacting to S&P’s decision to cut the Republic’s rating, economists and market analysts yesterday homed in on its concern that there would not be a credible plan for the public finances until after the next election.
Mr Gill told The Irish Timesthat the statement was not meant to question the State's leadership, and simply reflected the challenge facing the Government and the uncertainty surrounding the banks. He also stressed that a AA+ rating was still broadly positive. "That is a very high rating and this suggests an extremely low probability of default," he said.
The ratings agency is keeping the Republic’s new credit rating on “negative” outlook, meaning that falling tax revenues could result in further downgrades and even larger interest bills for public borrowing.
