Ireland is now rated at 'AA' with a negative outlook, S&P said. It was previously 'AA+', down from a 'triple-A' rating only three months ago.
"The rating could be lowered again if asset quality in the Irish banking system deteriorates at a faster pace than we expect," S&P said in a statement.
The downgrade is seen heaping more pressure on Prime Minister Brian Cowen's coalition government, which faces a vote of no confidence on Tuesday after a record rout in local elections and the embarrassing loss of a crucial European Parliament seat in Dublin to a Eurosceptic rival.
In reaction to S&P's decision, Finance Minister Brian Lenihan insisted his policies were putting the former 'Celtic tiger' economy on the right track. "It should be recognised that (S&P's) assessment reflects developments which have taken place over the last while and reflects market developments," he said in a statement.
S&P said the downgrade followed the announcement of losses at the nationalised Anglo Irish Bank, and it also cited the scale of the government's "bad bank bank" plan (EurActiv 08/04/09).
The Irish state will start taking on the liabilities of bank loans and assets with a book value of up to 90 billion euros ($124.5 billion) from July, when a newly-formed National Asset Management Agency starts operating.
Despite providing relief to a banking system reeling from toxic property loans, the Irish 'bad bank' plan could cause national debt to surge past 100% of GDP from about 41% last year.
Rival rating agency Moody's warned in April that it could cut also Ireland's AAA credit rating within three months because of the country's soaring debt. Fitch, which cut Ireland's AAA ratings by one level to AA-plus in April, said in an interview that an election may be needed to give the government a fresh mandate to pursue its policies and that it was closely monitoring Irish tax revenue performance.
Traders in London said that the news was the catalyst for losses in the euro which fell badly against the dollar and the yen, according to Reuters data, reaching its lowest level in more than a week versus the US currency.
(EurActiv with Reuters.)
