Standard & Poor's says republic faces threat of credit downgrade as fresh debt fears drive down euro on foreign exchanges
Ireland has two years to convince financial markets that it is different from Greece or it will face the prospect of a fresh ratings downgrade, it emerged on Wednesday as the euro was dragged down on the foreign exchanges by fresh sovereign debt fears.
The ratings agency Standard & Poor's said it was not yet ready to put Ireland in the same category as Greece – where one leading official said that the alternative to even deeper spending cuts would result in the country leaving the single currency and returning to the drachma.
The S&P warning came as the EU's fisheries commissioner, Greece's Maria Damanaki, argued that the country's participation in the euro is under threat. In a statement on her own website, Damanaki said: "The greatest achievement of postwar Greece – the euro and the country's European course – is in danger."
George Papandreou, the prime minister, has insisted that he is determined to keep Greece in the eurozone, but Damanaki added: "The scenario of removing Greece from the euro is now on the table."
Trevor Cullinan, S&P's lead analyst for Ireland, said there would be serious consequences if the government in Dublin could not get access to debt markets by 2013. The warning came as the Paris-based Organisation for Economic Co-operation and Development said in its half-yearly health check on the west's richest economies that the debt position of Greece, Ireland and Portugal would be unsustainable should the current high levels of market interest rates persist. Irish 10-year bond yields have more than doubled over the past year from 5% to 11%.
On the foreign exchanges, the euro fell to a record low against the Swiss franc and to its weakest against the pound in two months. Speculation has gripped financial markets in recent weeks that even fresh financial assistance from the European Union and the International Monetary Fund will not solve Greece's mounting debt crisis.
The OECD said that even if Greece, Ireland and Portugal met their tough deficit-reduction targets, "their fiscal positions would not be sustainable if market interest rates were to remain for long at their current rate".
It added that in the absence of a return to market confidence, the "unsustainable condition" could be tackled in one of three ways – by further bailouts, a rescheduling of debt or by even more drastic restructuring of their finances.
Ireland's government has said it hopes to tap investors in 2012 but if it cannot convince markets of its financial soundness it may have trouble finding them. This would raise the prospect of it being pushed into the arms of Europe's permanent rescue mechanism, which might require some restructuring of privately held sovereign debt."If the conditions then [2013] mean that Ireland can't finance itself at a rate that would allow for the debt to be put on a sustainable trajectory then, yes, there would potentially be implications," Cullinan said.
Ireland must maintain growth to avoid a downgrade, and an acceleration of austerity measures or an increase in the corporate tax rate could threaten this, he said.
The Irish government is currently implementing a €15bn fiscal adjustment in the four years to 2013.
"Potentially any consolidation over and above that would have an even more negative impact on growth prospects," Cullinan said. "At the moment we are comfortable with the government plans as they stand."
Ireland's low 12.5% corporate tax rate, a bone of contention with France and several other EU states, is key to the country's recovery strategy, he said.
"Any substantial change in those arrangements to the detriment of the multinationals would potentially be negative for Ireland's economic growth prospects and potentially negative for the rating," he said.