Tags: Ireland Financial Crisis

Irish Vote to Cut Welfare as Fitch Downgrades Rating

Friday, 10 Dec 2010 02:45 PM

Ireland's lawmakers narrowly voted Thursday to cut welfare benefits and debated a raft of other cost-slashing measures, but their efforts to combat Europe's worst deficit didn't stop the Fitch agency from slashing the nation's credit rating.

A legislative bill to cut payments to the unemployed, single parents, children, the blind and disabled passed on an 80-75 vote that reflected Prime Minister Brian Cowen's slim majority in parliament.

Lawmakers immediately turned to another bill expected to be passed Friday that will cut state pensions, government leaders' salaries and the minimum wage — all part of a budget published this week that seeks to reduce the 2011 deficit by an unprecedented 6 billion euros ($8 billion).

Thursday's approved cuts reduce welfare payments to more than 300,000 people by 4 percent, creating annual savings of more than 530 million euros ($700 million).

Cowen also announced he would ask the parliament on Wednesday, Dec. 15, to approve the 67.5 billion euro ($90 billion) European Union-International Monetary Fund bailout negotiated last month for his debt-crippled country. The two major opposition parties, Fine Gael and Labour, say they will negotiate terms of the bailout if they gain power, as is widely expected, following national elections in the spring of 2011.

Cowen said he was confident of victory and wanted to use next week's vote to put his opponents' economic policies on the spot. Cowen challenged opposition leaders to explain how they would fund Ireland's deficits and its cash-strapped banks if they tried to challenge the existing EU-IMF loan terms.

"Fine Gael, the Labour Party and (Irish nationalist) Sinn Fein continue to try to make the public believe that there is an easy way out of the country's funding crisis," Cowen said. "Given the seriousness of the situation, I do not believe this myth can be allowed to continue unchallenged."

Cowen said a vote backing the EU-IMF rescue, while not legally necessary for it to proceed, would "give certainty to the international community that the deal has been confirmed by the parliament, that the country is doing what needs to be done to repair its public finances, and that Ireland is up to the challenge."

The Fitch ratings agency, however, registered its growing doubts that Ireland could rebound. It dropped Ireland's credit-risk score three notches to BBB-plus, citing the country's massive bailout as an admission that its debt crisis was worse than advertised.

The only two other countries meriting a BBB-plus on Fitch's list are Libya and South Africa. Greece, which in May became the first eurozone member to be saved from bankruptcy by an EU-IMF bailout, has a BBB-minus rating — one grade above junk-bond status.

Fitch said its outlook on Ireland was stable, meaning no further downgrades are expected. Fitch last cut Ireland's grade Oct. 6.

Fitch sovereign ratings director Chris Pryce said Ireland's finances have badly deteriorated amid sagging tax collections and a bank-bailout bill that the government in September estimated at 45 billion euros. Analysts warn the ultimate bill could be tens of billions higher, and the EU-IMF loan will swell Ireland's deficits with an average interest rate of 5.8 percent.

When asked whether Ireland appeared at risk of an eventual default on loans, Pryce said Fitch's BBB-plus score "is an investment-grade rating. That doesn't mean we believe the state will default. Of course there's a chance it will default, but that's not the position we're taking."

On Nov. 23, Standard & Poors became the first ratings agency to cut Ireland's grade over the bailout talks, by two notches to A. The other major agency, Moody's, said it expected to recommend a multi-notch downgrade from its own AA2 rating.

Ireland is spending more than 50 billion euros this year on day-to-day government operations but collecting just euro31 billion in tax. It has committed tens of billions more to prop up five Dublin banks, driving the 2010 deficit to a postwar European record of 32 percent of GDP.

As part of their loan agreement, European and IMF experts expect Ireland to slash spending and raise taxes for the next four years until annual deficits can be reduced to 3 percent of GDP, the limit for the 16 nations that use the euro currency.

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Ireland's lawmakers narrowly voted Thursday to cut welfare benefits and debated a raft of other cost-slashing measures, but their efforts to combat Europe's worst deficit didn't stop the Fitch agency from slashing the nation's credit rating.A legislative bill to cut...
Ireland Financial Crisis
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2010-45-10
Friday, 10 Dec 2010 02:45 PM
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