Moody's cut Ireland's sovereign rating by two notches to the verge of junk status and kept its outlook on negative, pushing the euro lower and adding to renewed pressure on the euro zone's weaker countries.
The downgrade cut short a rare spell of good news for debt-ridden Ireland after the government said on Thursday it had passed a review of its economic progress by creditors and ratings agency Fitch upgraded its outlook.
The move also followed a soaring of Greek borrowing costs to new highs on Thursday after Germany said for the first time that Athens may have to restructure its huge public debt, turning up the heat on fellow strugglers Ireland and Portugal.
Moody's said Ireland's growing debt burden was expected to be high by EU standards and that weak economic growth prospects together with the expected decline of the government's financial strength threatened its ability to manage debt as it has done in the past.
"Should the intended fiscal consolidation goals not be met, a further rating downgrade would likely follow," Moody's said. "Moreover, a further deterioration in the country's economic outlook would also exert downward pressure on the rating."
Moody's said the downgrade to BAA3 from BAA1 - which puts its rating two notches below both Fitch and Standard and Poor's - was also due to uncertainty around solvency tests required by the European Stabilization Mechanism (ESM).
It said the country may need to take further austerity measures to meet its fiscal goals and that its financial position may suffer as a result of rises in European Central Bank interest rates.
It added, however, that upward pressures could also develop on the rating and that Ireland's long-term potential growth prospects remain higher than those of many other advanced nations.
The euro fell to a session low against the dollar after the ratings cut, falling as low as $1.4451, down 0.2 per cent on the day, and moving further away from its 15-month high around $1.4521 hit earlier this week.
City A.M. Reporter