RATINGS AGENCY Moody’s has predicted the Irish economy will grow by just 1 per cent next year; lower than the 1.3 per cent forecast by the Government.

In its Weekly Credit Outlook, the ratings agency said that while Ireland’s 2012 budget and fiscal projections will support the country’s debt rating, a deceleration in European economic activity, fragile banking systems and “partly dysfunctional credit markets” will have a negative impact on Ireland.

Minister for Finance Michael Noonan forecast last week that the economy would grow 1.3 per cent next year, down from an earlier forecast of 1.6 per cent.

The ratings agency also said that last week’s agreement by European policymakers offered few new measures to resolve the region’s debt crisis.

It still expects to review its ratings of all European Union sovereign credit in the first quarter of next year.

“In substance the communique offers few new measures, and does not change our view that risks to the cohesion of the euro area continue to rise,” Moody’s said in its weekly credit report.

Twenty-six of the 27 European Union leaders on Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to €200 billion in bilateral loans to the International Monetary Fund to help tackle the crisis.

Yesterday European stock markets, in the first full day of trading since the deal was signed, delivered their verdict on the deal. Equity markets retreated across the board, with the deal focused on strengthening budget discipline failing to restore financial market confidence.

National benchmark indexes retreated in all 18 western European markets. France’s CAC slid 2.3 per cent, the FTSE 100 fell by 1.5 per cent and Germany’s DAX lost 3 per cent. In Dublin the Iseq index closed down almost 1 per cent.

Meanwhile, Greece began negotiations yesterday with international debt inspectors on its second rescue loan package. Greek finance minister Evangelos Venizelos said Greece hoped to conclude negotiations on the debt restructuring which was part of the bailout by the end of January.

There was some good news from Italy, after the heavily indebted country sold €7 billion of one-year bills, the maximum for the auction, with a reduced yield, after prime minister Mario Monti’s government approved a €30 billion emergency economic plan. Borrowing costs fell to 5.952 per cent from 6.087 per cent at the last sale on November 10th after

Italy’s debt of €1.9 trillion is more than that of Spain, Greece, Portugal and Ireland combined.

In the secondary markets, the 10-year Italian bond yield increased 18 basis points after earlier surging as much as 43 points. Spanish debt also spiked yesterday, with the ECB intervening to buy short-term Italian debt.

The central bank slashed bond purchases in the week before the EU summit as it raised pressure on the bloc’s leaders to introduce tighter debt controls and make further public spending cuts.

Germany’s top central banker cooled speculation over the weekend that the ECB would extend its role. President Jens Weidmann said the onus was on governments rather than the ECB to resolve the crisis.

French president Nicolas Sarkozy said the legal basis of last week’s deal would be worked out before Christmas, and the aim was to have it ratified by all member states except Britain by June.

“In the next fortnight, we will put together the legal content of our agreement. The aim is to have a treaty by March,” Mr Sarkozy said.

An EU diplomat said the first draft of the new treaty would be ready by early next week. – (Additional reporting Bloomberg)