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Irish Recovery Hampered by Moody's Downgrade

The Irish economic recovery has been held back by credit ratings agency Moody's downgrading its rating to junk status, Minister for Jobs, Enterprise and Innovation Richard Bruton said Wednesday.

irish policeman eu bailout protestors
Peter Muhly | AFP | Getty Images

Market attention returned to the bailed-out former Celtic Tiger Wednesday after the downgrade, which was criticized by Irish politicians.

"They're looking at the debate of how Europe will handle the crisis and they are seeing collateral damage for Ireland potentially down the road in these instruments," said Bruton, who is the younger brother of former Prime Minister John Bruton.

Moody's warned that the debt-laden country would likely need a second bailout, less than a year after it took a 67.5 billion euro ($94 billion) package from the European Central Bank (ECB) and International Monetary Fund (IMF).

Since then, Ireland has taken on harsh austerity measures, including widespread cuts to public sector pay, without the scale of unrest seen in fellow bail-out recipient Greece.

Irish exports have risen as companies from outside the country were attracted by its low corporation tax rate, which has been maintained despite rising taxes elsewhere. Exports in April were up by 6 percent from April last year, with the pharmaceuticals and chemicals industry particularly strong.

"I don't believe austerity is the way to growth, you need a balance between austerity and growth," Stephen Gallo, head of market analysis at Schneider Foreign Exchange, told CNBC Wednesday.

Ireland is different to Greece because there has been more acceptance of austerity measures by the Irish population, he believes.

"This is agencies looking at a European strategy and we have been caught up in their view of the European solutions," Bruton said.

He added that some investors would be locked out of the market by Moody's decision.

"This means for certain investors, Ireland is now taken off their radar, they will not touch Irish borrowings, that is bad for us, that makes the whole job of recovery more difficult," said Bruton.

Ireland enjoyed more than a decade of sustained economic growth and rapidly growing property prices until the credit crisis of 2008, when high borrowing levels hit the country's banking system.

The government then guaranteed deposits for the country's banks, which are still struggling.

"A lot of people have relied on credit rating agencies, although less now than two or three years ago," Stewart Richardson, partner at RMG Wealth Management, told CNBC Wednesday.

"The biggest problem today is that people don't know where the exit is… There's just no growth, so every time we have a hiccup there's more austerity and we don't see how that's going to generate growth," he added.

"You have got a debt pile to service, interest payments going up – it just doesn't work… This (downgrade) means there is more pressure to do something sooner for EU politicians," Gallo said. "We have not seen any decisive step yet on Greece, Ireland and Portugal, so we have completely bypassed Spain and gone to bigger fish."

"You are not going to solve the crisis with a wimpy devaluation or some kind of easing from central banks, you do it by changing the structure of the economy," he added.

"If this had been done before these countries entered the euro, they would not be where they are now."

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