Cost of borrowing could shoot up amid rating woes

THE cost of Ireland’s borrowing could shoot up early next year as the credit rating of the eurozone countries as a whole and the bailout fund we are reliant on are threatened with credit downgrades.

If the Government succeeds in returning to the markets in 2013, it could face a difficult time trying to borrow because of unprecedented demand by other countries, the OECD has warned.

Getting back to sustainable levels of debt depends on being able to borrow as cheaply as possible, and the Government is hoping that the bailout fund will provide a new long-term, cheaper loan to allow the state repay expensive money it borrowed to bail out the banks.

But the three major credit ratings agencies yesterday warned they will consider downgrading eurozone countries in the new year as the markets gave the thumbs down to the rule-enforcing fiscal pact agreed by most EU leaders on Friday.

Concerns were further heightened by French President Nicolas Sarkozy, who appears to be getting his citizens used to the idea of the country losing its triple-A credit rating status in the new year.

But perhaps the most chilling warning came from the chief economist of Standard & Poor’s, Jean-Michel Six, who singled out Germany as being in need of a wake-up call.

“There is probably yet another shock required before everybody in the eurozone reads from the same page, for instance a major German bank experiencing some real difficulties on the markets, which is a genuine possibility in the near term,” Reuters said he told a business conference in Tel Aviv.

“Then there would be a recognition that everybody is indeed on the same boat and that even German institutions can be affected by this contagion. I’m afraid this may still be required.”

This reminder that the summit deal was not enough follows on S&P’s putting 15 of the 17 eurozone countries on a watch-list for a possible downgrade.

Moody’s was equally negative about the summit outcome while Fitch said the lack of a comprehensive solution has increased the pressure on eurozone countries’ ratings.

But there is a fear that Moody’s and S&P may move against France soon, having downgraded three of its largest banks last week.

The OECD’s sovereign borrowing outlook, released last night, said that governments face “unprecedented challenges in the markets for government securities”.

Raising large volumes of funds at lowest cost, with acceptable rollover risk, remains the great challenge for governments while growing concerns among investors has resulted in the off-loading of significant holdings of European debt, it notes.