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Thomas Molloy: S & P's optimism is a cause for quiet celebration

WE have learned the hard way that the rating agencies which grade countries and companies are among the world's most powerful organisations.

Their views have the power to push up the cost of borrowing which can force governments to raise taxes or even default.

The agencies are so powerful that many blame them for the sub-prime crisis in the US which tipped the West into recession three years ago. But despite the agencies' mistakes, nobody can afford to ignore them and few can cross them.

Both the Irish Government and the National Treasury Management Agency (NTMA) have been reminded of this basic truth in recent months after picking fights with Standard & Poor's (S&P) which they promptly lost.

In March last year, Brian Cowen attacked S&P for comments which suggested that "new faces" in Government would help to solve the crisis in the public finances -- an analysis that accompanied the rating agency's decision to strip Ireland of its valued and hard-won "AAA" rating.

While the Taoiseach may have been able to win some short-term capital by criticising S&P in the Dail for commenting on the local political situation, he was doing little more than taking pot shots at the messenger.

The subsequent rise in the cost of borrowing to record levels suggests Ireland's creditors agreed with S&P's analysis rather than Mr Cowen's.

Two months ago, it was the turn of the Department of Finance to beg S&P not to downgrade our debt.

When that failed, NTMA boss John Corrigan took to the airwaves to lash the agency for allegedly using the wrong calculations when it lowered Ireland's credit rating for the third time in 18 months.

Mr Corrigan may have been correct when he suggested that S&P was wrong to say much of the banks' loans were worth nothing but most bondholders will have ignored the methodology and noticed instead that the rating agency's €50bn estimate for the bank bailout was far more accurate than those produced by the Government or the Central Bank.

The latest comments from S&P, which suggest that the agency is not as pessimistic as some other observers, will carry weight overseas precisely because S&P has been so down on Ireland over the past two years and because the agency has form when it comes to forecasting what is happening here.

Only time will tell whether S&P is right when it says that the Irish economy is likely to recover faster than other weak eurozone countries such as Portugal, Spain and Greece -- but S&P's track record offers reasons to be cheerful.

It may not quite be time to crack open a bottle of champagne but perhaps it is time to open a bottle of beer and toast the possible beginnings of a recovery.

Irish Independent