Government bond ratings from Ireland were downgraded by Moody's (NYSE:MC), a good reminder that the sovereign debt crisis in the European Union remains a key component of global economic health, and the patient remains in serious condition, possibly ready to move to critical.
The major reasons given be Moody's for the downgrade were these:
- The government's gradual but significant loss of financial strength, as reflected by the substantial increase in the debt-to-GDP ratio and weakening debt affordability.
- Ireland's weakened growth prospects as a result of the severe downturn in the financial services and real estate sectors and an ongoing contraction in private sector credit.
- The crystallization of contingent liabilities from the banking system, as represented by a series of recapitalization measures and the need to create the National Asset Management Agency (NAMA), a government-created special purpose vehicle that is acquiring impaired loans from banks.
It's good that Moody's did this, more, again, from the perspective that investors need to be reminded of the ongoing weakness of the European Union.
A number of media outlets, including financial ones, have been making it look like Europe was out of deep trouble and was doing well. That's far from the truth, and the sovereign debt crisis remains a major challenge for the global economy going forward, as the overall EU is the largest economy in the world.
As far as the actual downgrade of Irish government bonds, it was from Aa1 to Aa2.
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