THE “VERY strong” commitment shown by Ireland and the EU-ECB-IMF troika to avoid default could change with developments in the euro zone, credit ratings agency Moody’s has warned.

The external risks in other heavily indebted countries could push the credit rating on the Irish Government into “junk” status, Moody’s warned in its annual credit report on Ireland.

The commitment to avoid default could also change as a result of “Ireland-specific events”.

The country’s funding environment “could potentially be negatively affected by adverse sovereign developments in other euro area peripheral countries”, said the agency.

“In Moody’s view, such a scenario would likely complicate Ireland’s aim of re-accessing the market and would exert downward pressure on its ratings.”

The agency said that the “Baa3” rating on Irish sovereign bonds was due to the sharp deterioration in the Government’s financial strength due to higher bank debts and uncertain economic outlook.

The rating is one notch above speculative or junk status.

The weak economic growth prospects were driven by the fiscal consolidation process, the limited available of private sector credit and an increasingly more adverse interest rate environment.

“Ireland’s economic and fiscal adjustment capacity continues to support the Government’s ability to stabilise its debt metrics in an adverse environment,” said Moody’s in the report.

The negative outlook, pointing to a further downgrade, was based on the view that the Government’s financial strength could decline further if economic growth were to be weaker than projected or the fiscal correction falls short of the Government’s planned path.

“Should the intended fiscal consolidation goals not be met or if the country’s economic outlook were to deteriorate further, a rating downgrade of Ireland’s Government bond ratings would likely follow,” said Moody’s.

The agency praised the Government’s commitment to fiscal consolidation and structural reform through its recovery plan and has “a track record of successfully adhering to fiscal reform”.

“A key strength is Ireland’s economic flexibility, as reflected in the competitiveness of its export sector and the country’s business-friendly tax environment, particularly the low corporate tax rate.”

Ireland’s rating could rise if attempts to fix the public finances, possibly supported by the resumption of significant economic growth, succeed in reversing the current debt problems, sustainably improving the Irish Government’s financial strength.