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Solution to euro crisis now more urgent than ever

The news that ratings agency Standard & Poor's is set to strip France of its Triple-A credit rating won't cause many tears to be shed in this country. However, we would be well-advised to keep any feelings of schadenfreude firmly under control. The latest series of downgrades, which also sees Austria lose its Triple-A rating, is a further sign that the euro financial crisis remains unresolved and is continuing to worsen.

In truth, having been flagged in advance for so long, the decision by S&P to downgrade France, while it will no doubt wound President Nicolas Sarkozy's amour-propre, and possibly his re-election chances, will have little practical short-term impact. As in the case of last year's American credit-rating cut, the impact of such a move had long since been priced into bond yields by the markets.

Far more worrying in the medium term is the continuing failure of Europe's leaders to solve the euro debt crisis, something which matters greatly to us in this country.

Yesterday the National Treasury Management Agency (NTMA), the state body charged with managing the national debt, published its 2011 results.

At the results announcement NTMA chief executive John Corrigan expressed the hope that Ireland could stage a partial return to the bond markets later this year and a full return in 2013. However, Mr Corrigan acknowledged that any return to the bond markets would depend on a resolution of the euro crisis.

Which is why France and Austria's loss of their Triple-A is potentially so worrying. If the turmoil in the financial markets continues into the summer and beyond and Irish bond yields remain at or close to their current elevated levels, then an Irish return to the bond markets would clearly be impossible.

This in turn would force us to seek a second EU/IMF bailout, something that has already been predicted by Citibank chief economist and former Bank of England Monetary Policy Committee member Willem Buiter.

With the interest rate on bailout funds averaging about 3.7pc and the yield on 10-year Irish government bonds still stuck at over 7.5pc, a return to the bond markets would be ruinously expensive for the Irish Exchequer.

Quite clearly anything other than a purely nominal return to the bond markets, where the NTMA only borrowed token amounts, depends on a very significant fall in Irish bond yields.

That is only likely to happen if Europe's leaders can overcome their differences and agree on a credible solution to the euro crisis.

Unless or until that happens we will require further bailouts and France can look forward to further downgrades to its credit rating.

Irish Independent