What happens when a triple-A rated sovereign government’s credit rating is cut? Quite a lot of unpleasant things really.
Sovereign rating transitions – at the top end of the scale – are always extremely messy affairs. Losing a triple-A rating matters much more than losing a double-A rating for any institution. For governments, all the more so.
In the eurozone there has always been a quartet of nations with a somewhat unstable rating position: the PIGS. That is, Portugal, Italy, Greece and Spain. Rating agency S&P though, in a slew of rating announcements this week, has affirmed Italy’s A+. So we need a new vulnerable I on the cusp of downgrade.
Step in, Ireland. With a triple-A rating.
S&P warned Ireland’s rating was on watch for downgrade last week. As the Irish economy tumbles the fear is that the country will go the way of another I: Iceland.
The government is preparing for drastic public service cuts: the kind of measures that are being undertaken to try and preserve the government’s rating. As the Irish Times reported yesterday:
THE MAJORITY of the €2 billion that must be cut from exchequer spending this year will have to come from pay cuts for civil and public servants, unions will be told by the Government next week.
Meanwhile, a public service union leader has warned members that the International Monetary Fund could be brought in if the Government cannot cut borrowing and bring the State’s finances back under control.
Yes, it’s serious enough that the IMF is being banded about as a possible saviour. Idle speculation? No. Here’s the Irish Times today (emphasis ours):
The Taoiseach Brian Cowen has endorsed the warning of a senior trade union official that the State’s borrowing figures are unsustainable and could possibly lead to the International Monetary Fund ordering mass dismissals of public sector workers in the future.
Mr Cowen said the comments of Dan Murphy, the general secretary of the Public Service Executive Union (PSE) were based on the evidence that has been provided by Government in its discussion with the trade union movement.
The IMF could, of course, be being used as a stick to subdue the Unions with. On the other hand, if S&P downgrades Ireland, as they are understood to be considering, then the situation will get rather bad. Borrowing costs will increase further. Not just for the government, but for Irish companies too.
Tension in the eurozone? Watch this space.