Credit rating agency Moody’s downgraded Irish debt, showing lack of confidence in the EU’s capacity of tackling the debt crisis, as EU leaders did not take any measures during their summit to thwart the expansion of market turmoil.
Moody’s lowered Ireland’s rating to Baa1 with a negative outlook, from the previous Aa2, and cautioned Dublin that more downgrades could follow if the government fails to stabilize its financial situation. The severe downgrade was taking place as EU leaders were in a summit aimed at restoring confidence in the Euro zone by implementing a financial recovery system that would come into force in 2013.
Analysts say that, although the downgrade is not surprising, the severity of it is shocking. Moody’s announcement is bound to further lower investor confidence in the context of the EU leaders’ failure to agree on concrete solution to the debt problem affecting Greece and Ireland, which already received bailouts from IMF/EU. The debt crisis might spread to Spain and Portugal, which are both under the looking glass owing to their high deficits.
In a final statement of the summit, the EU leaders acknowledged the severity of the situation, saying that current events showed that financial problems in one EU member state can spread quickly to other countries through a variety of channels.
The leaders of the 27 EU states asked for an increase of the bailout fund and more flexibility when it comes to its use, so that troubled states could make use of it before credit markets exclude them. The whole pursuit however did not result in any practical solutions and it was coined by analysts as yet another missed chance to bring calm to the markets.
The German Chancellor, Angela Merkel, tried to bring a positive note saying that further increase of the bailout fund was not needed and that she was pleasantly surprised by the measures announced by the Spanish and Portuguese governments.