In the endless tumult of the Greeces and Spains of the world, Ireland has almost become the forgotten member of the PIIGS – a quaint anachronism from the days when European sovereign-debt crises seemed all so exciting and new. But the Emerald Isle is also a poignant example of just how long the road ahead is for the euro zone's troubled children.
Debt-rating giant Moody's Investors Service on Wednesday issued its annual credit report on Ireland – not a rating change, but rather a reminder that the country's debt problems haven't gone away, even if they have faded into the background of public imagination. For the record, Moody's still rates Ireland's debt Ba1 (higher than Greece's, lower than Spain's), having dropped the country to a speculative-grade rating for the first time last July. And it has a negative outlook on Ireland, implying that the next ratings move is more likely down than up.
It's been two full years now since the European Union and International Monetary Fund bailed out Ireland and the country committed to reining in its fiscal deficit. Yet the country's debt mountain continues to grow; Moody's doesn't expect Ireland's debt-to-GDP ratio to peak until 2013-2014, when the rating agency sees the measure reaching 120 per cent. (To put that in perspective, Greece's net debt-to-GDP ratio is about 170 per cent, according to the IMF, while Portugal's is nearly 115 per cent. Spain's is about 80 per cent, roughly in line with the United States'. Canada's net debt-to-GDP is about 35 per cent.)
What's worse, the timing of Ireland's expected debt-to-GDP peak will more or less coincide with its money running out. Moody's believes the EU/IMF package has given Ireland enough funding to cover its obligations to the end of 2013, but after that it's anyone's guess.
In July, Ireland tiptoed back into the global bond market with its first new sovereign issue since October, 2010 (it was essentially sidelined from the market under the terms of the November, 2010, bailout), but whether it's ready to stand on its own in the market once the EU/IMF supports fall away is another (and much bigger) question.
The big problem for Ireland is, essentially, the big fear for the likes of Greece and Spain: That government austerity measures will kill the economy, choking off the very tax-revenue growth that would help those same governments bring their budgets back into balance. In other words, a vicious debt circle.
"The negative ratings outlook reflects the implementation risks to the country's deficit-reduction plan, particularly in light of the continued weakness in the Irish economy," Moody's wrote.
On the upside, Moody's likes Ireland's stable and predictable policy framework, and the progress it has made on its commitments to fiscal restraint and financial-sector policy reforms. And it likes Ireland's economic competitiveness, marked by a "business-friendly" tax environment and the country's success in retraining wages since the debt crisis hit.
Nevertheless, Ireland is still treading in treacherous waters – and it's still a long way to shore. Greece, and others, take note.