Irish debt worries hit credit outlook, costs

Ireland's cost of borrowing rose to the highest in the euro zone Friday _ reflecting fears it is most likely to default on loans _ as credit ratings agency Moody's warned that the country will struggle with debt for years.

Moody's said it was considering a possible downgrade in Ireland's top-rated AAA grade if the government cannot get its swelling deficit under control. The New York-based agency lowered its Irish debt-rating outlook from neutral to negative, a possible precursor to dropping Ireland to the second-highest rating of AA1.

Moody's said Ireland's September 2008 decision to insure all deposits and debt commitments in the nation's debt-troubled banks meant it had taken on alarming potential liabilities. In a statement the agency said weakened banks, government red ink and rising unemployment were "likely to significantly affect Ireland's economic strength and government financial strength for years to come."

Meanwhile, agencies that measure the cost of government borrowing worldwide noted that Ireland has just overtaken Greece as the riskiest country in the 16-nation euro zone for backing government debt.

The interest rates that banks charge Ireland for borrowing have steadily increased since the government announced its bank-insurance plan _ and surged earlier this month after the government seized control of the country's third-biggest bank, property lending specialists Anglo Irish Bank Corp., to prevent its collapse amid a loan-hiding scandal.

Protecting Ireland's credit ratings and lowering its cost of borrowing will require the government of Prime Minister Brian Cowen to reverse its current dive into the red.

Cowen has been pressing the country's major labor unions and employers to tear up their most recent national wage pact _ because the government budget cannot afford to raise the wages of state-paid workers, including police, teachers and nurses. He is seeking to cut euro2 billion ($2.6 billion) from government spending this year, chiefly by freezing wages and cutting payrolls, in hopes of keeping the budget deficit below euro10 billion.

Cowen started his Friday at the global economic forum in Davos, Switzerland, trying to reassure bankers, analysts and journalists that Ireland remained in strong financial shape. He returned to Ireland to oversee negotiations between unions and employers that were expected to run day and night all weekend.

On Thursday, the Irish Central Bank warned that Ireland's gross domestic product was likely to fall 4 percent and unemployment rise to 9.4 percent. That would mean even less taxes and greater welfare expenses for a government that, until last year, had enjoyed a decade of nearly uninterrupted budget surpluses on the back of growing employment and a property boom.