Ireland most exposed to global economic shocks
Government faces race against time to secure finances, says Fitch
Peter Muhly/AFP/Getty Images
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IRELAND, Spain and Switzerland have the highest direct exposure to shocks from the global economic crisis among the smaller 'AAA' rated countries, and our small size means we have less time to place our finances on a sustainable path, bond rating agency Fitch said yesterday.
Brian Coulton, head of global economics at Fitch Ratings, said that in the current climate, with investors looking for safe assets, smaller borrowers, such as Ireland, have less ability to pursue economic policies, and less time to place public finances on a sustainable path, than the big 'benchmark' borrowers, such as the US, Britain, France and Germany.
"The sheer size of the fiscal revenue shock in Ireland and its relatively small government bond market constrain the ability of the Government to take counter-cyclical policy measures," Mr Coulton writes in the report. "This was a factor in Fitch's recent decision to place Ireland's rating on Rating Watch Negative."
All three of the world's largest rating agencies said in recent months that they are reviewing Ireland's credit rating. Ireland's bond yields, an indicator of the cost to the taxpayer of borrowing money overseas, have risen sharply as investors worry about our ability to repay our rapidly rising debt.
Budget
Still, credit-default swaps on government debt, which reached a record 396 basis points on February 17, have since dropped to 280 points following news of April's emergency Budget and hints by German Chancellor Angela Merkel that Germany would help Ireland if needed.
Ireland has a large exposure to property lending and the banking sector in general (as a percentage of GDP) while our banks have a comparatively high exposure to the struggling economies of central Europe, the report notes.
Public sector debt is set to rise by 20 percentage points by 2010 compared with 2008, it adds.
On a positive note, the report says Ireland has a good record of paying off debt, while euro membership helps our financing flexibility.
Elsewhere in the euro area, Austria and Finland could face greater challenges than peers in the event of an unexpectedly large fiscal shock, according to the report.
- Thomas Molloy
