Celtic tiger relegated to Europe's financial second division

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The Independent Online

The strains within the eurozone seem set to grow as Ireland had its credit rating downgraded by Standard & Poor's yesterday. It is the fourth member of the single currency group to be thus treated in recent months.

Ireland lost its AAA rating, being demoted one step to AA+, with a "negative" outlook – indicating that the agency is more likely to lower the classification again than raise it or leave it unchanged.

S&P said: "The deterioration of Ireland's public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government's current plans."

Ireland has enjoyed AAA status since 2001.

The stern warning follows similar views from a variety of agencies on Spain, Portugal and Greece. All these nations have seen the debt issued by their governments command significant risk premia over the comparatively safe Bunds issued by the German authorities. Irish debt was trading at a spread of 235 basis points before the S&P downgrade was announced.

Last week Ireland revealed that its economy had shrunk by 7.5 per cent year on year in the last quarter of 2008, one of the weakest performances in Europe.

The governor of the central Bank of Ireland recently forecast that GDP will fall by more than 6 per cent this year, and the unemployment rate will average more than 11 per cent. The European Commission forecast in January that Ireland's budget deficit may widen to 11 per cent of GDP this year, about the same as the UK's and some four times the European Union's approved limit according to the Maastricht treaty.

S&P added: "We believe that Ireland's net general government debt burden could peak at over 70 per cent of GDP by 2013, a level we view as inconsistent with the prospective debt burdens of other small eurozone sovereigns in the 'AAA' category."