From the TUC

If Ireland’s cuts are such a great example for Britain, why has their debt just been downgraded?

19 Jul 2010, by in Economics

Credit rating agency Moody’s today downgraded Ireland’s credit rating from Aa1 to Aa2, just a day before an auction of one and a half billion Euros in government bonds.

Moody’s cited an expected slowdown in Irish growth (and consequent loss of tax revenues) and the high cost of Ireland’s bank rescues which added up to “gradual but significant loss of financial strength.” Standard and Poor’s downgraded Ireland for a second time in April after Fitch downgraded in November.

Enthusiasts for austerity often praise Ireland’s tough cuts as a model for this country. But today’s experience highlights one of the dangers of cutting your way to recovery. The cuts are justified on the grounds that bond traders will raise the interest we have to pay on government debt unless the deficit is cut, and they are especially likely to do that if ratings agencies give a country a lower grading.

But slow growth, which hits government revenues, can spook the traders every bit as easily as high deficits. Cuts that are harsh enough to send the UK back into recession are self-defeating and can lead to a fiscal death spiral – cuts hit growth, which makes bond traders nervous, so they raise rates, making the debt harder to service, so the traders demand more cuts, which further damage growth ….

2 Responses to If Ireland’s cuts are such a great example for Britain, why has their debt just been downgraded?

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    Jul 19th 2010, 3:34 pm

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    Jul 20th 2010, 3:50 am

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