Ireland’s announcement that the cost of its support of Bank of Ireland would amount to up to €34 billion sent the euro down against sterling this morning, as the enormity of Dublin’s financial commitment began to sink in.
The bailout costs will push the Irish fiscal deficit from 11.75% of GDP in 2010 to an eye-watering 32%, somewhat above Maastricht Treaty guidelines of 3%. The single currency was hit further by news that ratings agency Moody’s had joined its counterparts Fitch and Standard & Poor’s in downgrading Spain’s credit rating from AAA to AA1 with a stable outlook. The agency cited a weak economic outlook and doubts that Madrid will hit its deficit reduction targets. It expects the Spanish government to meet its budget target of debt as 9.3% of GDP but thinks it will be difficult for debt to reach 3% of GDP by 2013. Continuing sovereign debt worries are likely to weigh on the euro for the foreseeable future until the markets are assured that the peripheral eurozone countries are not likely to default.