Ireland's Economy Takes A Hit : Planet Money Ireland's credit rating takes a hit.
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Ireland's Economy Takes A Hit

Ireland has been one of the worst-hit economies during this financial crisis, and today the Irish woke up to even more bad news. Standard & Poors, the credit rating agency, has lowered their credit rating. from AAA (the highest rating) to AA+ with a negative outlook.

Ireland's rating is now the same as Belgium's and Spain's. A lower credit rating increases a government's cost of borrowing. The downgrade has also increased the price of insuring Irish government bonds in the case of default -- the cost of a credit default swap rose today by about a third of a percent.

This is bad timing for the Irish government. Like the U.S., Ireland is also trying to spend its way out of the crisis -- and to do that it needs to borrow money. The European Commission forecast in January that Ireland's budget deficit may widen to 11 percent of gross domestic product. That's three times the limit allowed by the European Union.

One reason Ireland's public finances are so bad is that their tax receipts are expected to drop by 20 percent this year. They have the lowest corporate tax rate in the European Union: 12.5 percent. This was considered a major boost to growth during the boom years, but is now cited as the reason the government has no money. Taxes are expected to rise, which could delay a recovery.

The light at the end of the tunnel for the Irish economy seems very far away these days. GDP contracted by 7.5 percent at the end of last year. It's quite a reversal of fortune. Ireland was considered the success story of the European Union for the past decade. In 2007 Ireland was considered the 12th richest country in the world based on GDP per person according to the World Bank, above the United States.