Ireland's troubled economy took a double hit Wednesday as ratings agency Fitch cut the nation's credit rating due to the downturn and the OECD predicted a worse-than-expected economic contraction next year. Fitch said it had lowered Ireland's sovereign credit rating to AA minus from AA plus, reflecting in part a severe shrinkage of the economy.
The OECD had earlier forecast that Irish gross domestic product would shrink 2.4 percent in 2010, worse than a previous estimate of 1.5 percent, and appealed for the state to cut spending and lift taxes to fix public finances. Ireland tumbled into a deep recession in the first half of 2008, becoming the first eurozone nation to do so in the face of an international financial crisis and a domestic property market meltdown.
"Fitch has downgraded Ireland's sovereign ratings to reflect the severity of the decline in nominal GDP and the exceptional rise in government liabilities," said Chris Pryce, director in Fitch's Sovereign Group, in a statement. "However, the agency notes the vigour of the government's fiscal consolidation response to date, the expectation of further aggressive budget tightening and the likely success of the National Asset Management Agency (NAMA) in rehabilitating the banking sector. "All these factors have helped stabilise the outlook for Ireland's creditworthiness."
Fitch has now lowered its sovereign credit rating for Ireland two times this year. The AAA rating signifies the highest confidence that a country will repay its borrowings, while AA minus is two notches lower. Irish Prime Minister Brian Cowen's government has brought in a series of emergency budgets and fiscal belt-tightening packages as it also struggles to deal with a ballooning public deficit.
The nation's banking sector has been particularly hard hit by the current global economic downturn. The state created a so-called 'bad bank' - the NAMA - to soak up billions of euros' worth of loans gone sour on the books of Ireland's financial sector. In addition, Anglo Irish, Ireland's third biggest bank, was nationalised in January and has received a four-billion-euro recapitalisation from the government.
Allied Irish Bank and the second biggest lender, Bank of Ireland, have also each received a 3.5-billion-euro capital injection from the government. Earlier Wednesday, the OECD had also forecast that the Irish economy was set to contract by 7.5 percent in 2009, which was better than an estimate in June of minus 9.8 percent.
"The Irish economy plunged into a severe recession in 2008, following a period of unsustainable growth," the OECD said in its annual report on the Irish economy. "Housing investment has slumped and large internal economic imbalances are unwinding, with the effect on demand compounded by the international financial crisis and global slowdown. "The adjustment, which is underway, will be prolonged and the economic recovery weak."
The Organisation for Economic Co-operation and Development, a policy forum and research base for the world's 30 leading industrialised economies, said the government must increase action to restore financial stability. "Irish banks have come under severe pressure, and major support from the government has been required," it said.
"The downturn has revealed a weak underlying fiscal position. The authorities have already taken important steps to restore stability, but more will need to be done." To balance the books, the OECD called for the government to return the banking sector to good health, cut public expenditure and increase taxation.
"Restoring the budget to a sustainable path will require both increases in revenues and cuts in public expenditure," the OECD said. "Tax rates have increased and the tax base should now be broadened by reducing inefficient tax expenditures, introducing a property tax and making more people pay income tax." In response to the OECD report, Irish Finance Minister Brian Lenihan welcomed the "fair and balanced" assessment of the nation's economy.
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