By: Irish Voice Columnist (email@example.com) | Published Friday, December 21, 2012, 5:39 PM | Updated Friday, December 21, 2012, 5:39 PM
IRELAND’S government bonds have been assigned junk status as a result of those moody debt experts, Moody’s.
This is a very unwelcome development for Taoiseach (Prime Minister) Enda Kenny and company, who have yet another impediment to get through with this announcement.
How will this affect the Irish economy?
Junk status means that the interest rate on a bond increases as the rating agencies -- and there are three, Moody’s, Standard and Poor’s, and Fitch -- present a detailed analysis that the risk of a default is higher.
Typically there are three letter ratings, A, B and C, with double combinations of these letters. An A rating conveys a very low risk and therefore a tiny probability of a default. But a C (or junk status) conveys high risk and thus a higher rate of interest to attract investors into the bond.
Celtic junk will have a negative effect on the Irish economy because the government will have to offer higher interest rates to bondholders, and this will necessitate an increased pressure on interest rates in Ireland in general. Ordinary people will then have to pay higher rates on their mortgages, car loans and credit cards.
Such a scenario will act as a double whammy on top of the already struggling Irish economy, creating an atmosphere of bleakness across the land.
We as a nation will become a tourist driven economy with and a place where tax loopholes for corporate headquarters will attract investment in the coming years. As the tourists stream through the new terminal in Dublin Airport, an opposite flow of passengers will be departing the country through the same terminal.
Last December I saw the new terminal, and I commented to my father as we drove past that the only reason the terminal was built was to facilitate the massive increase in immigration numbers anticipated by the Irish government as the economic catastrophe continues.
In previous letters to this newspaper and in an opinion piece, I predicted interest rates increasing over the next few months and years, and the ratings development by Moody’s augers badly for the Irish economy.
Investors typically listen to and observe the ratings agencies, even if they’re way off (as they were when it came to subprime mortgages and complicated derivatives that bundled crap mortgages with good ones). Should we trust the analysis presented by such institutions?
Unfortunately for Ireland and its Celtic junk, Moody’s and their buddies wield much more economic power than Kenny et al.
Ultimately the taxpayer will be forced to repay these junk bonds as they mature with whopping interest rates attached.
Meanwhile immigration will continue to ramp up creating another brain drain, and terminal two will be buzzing with traffic flowing the wrong way!
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