Moody's said it may cut Ireland's AAA credit rating within three months as its debt levels are set to rise steeply in the face of a banking and fiscal crisis.
Standard & Poor's and Fitch have already downgraded the State's sovereign rating and the signal that Moody's could follow suit sent the euro falling to a fresh one-month low of $1.3057, compounding investor concerns about the health of some euro zone economies.
Investors also demanded a higher premium to hold Irish debt rather than Bunds.
“Today's rating action reflects the severe economic adjustment taking place in Ireland, which threatens to undermine the country's low tax, financial services-driven economic model,” said Dietmar Hornung, Moody's senior analyst.
“Ireland has lost both economic and government financial strength relative to its AAA peers over the past year.”
“Should Moody's come to the view that Ireland will emerge from the crisis with relatively weak growth prospects and a much higher debt burden for the foreseeable future, Ireland would be downgraded to the mid-to high Aa rating range," the agency said.
Ireland’s historically low debt levels could surge to potentially 100 per cent plus of gross domestic product (GDP) next year from around 41 per cent last year as it tries to deal with tens of billions of euros in impaired property loans.
A deep and protracted housing collapse after years of boom has exacerbated the impact of a global recession.
Last week, the Government unveiled its second emergency Budget in six months to tackle a rapidly rising Exchequer deficit but even with sharply higher taxes and some spending cuts it is still facing a shortfall this year and next of 10.75 per cent of GDP, over three times the EU's limit.
Reuters