Ireland's debt rating was lowered two steps by Standard & Poor's yesterday, with a negative outlook, as the nation's bailout of its banking system is set to escalate the Government's borrowing needs.
"The Irish Government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland's troubled banking system," S&P said.
Putting the rating on "CreditWatch with negative implications" reflects risk of a further downgrade if talks on a European Union-led rescue fail to staunch capital flight, it said.
The downgrade risks worsening an investor exodus from Irish bonds that has sparked contagion through the euro region, with Spanish bonds tumbling yesterday, pushing the 10-year yield premium over German bunds to a euro-era record.
Ireland is hammering out an aid package with the EU and the International Monetary Fund to rescue its banking system.
S&P cut Ireland's long-term sovereign rating to A from AA- and the short-term grade to A-1 from A-1+, today's statement said. The reduction leaves its long-term grade five steps above junk, or high-risk, high-yield status, and five steps higher than Greece.
It's now on a par with foreign currency ratings of Israel, the Czech Republic and South Korea.
Moody's Investors Service said two days ago a "multi- notch" downgrade in Ireland's credit rating was "most likely" because the bailout would increase its debt burden. Moody's has an Aa2 long-term rating for the Government, three steps higher than S&P's new grade. Fitch Ratings has an A+ grade, one above S&P, Bloomberg data show.
EU officials estimate that a rescue package for Ireland may amount to about €85 billion ($149 billion), according to two officials familiar with the talks.