Moody's, the US credit ratings agency, today joined its two rivals  - - Standard & Poor's and Fitch  - - in downgrading Ireland's debt on worries about the country's public finances and the planned transfer of toxic property loans to the State "bad bank" - - the National Assts Management Agency (NAMA). The agency said it will also be monitoring Ireland's plans to cut public spending.

The agency said it had lowered its rating by one notch to AA1 from the top AAA level and warned that another downgrade was possible. Moody's had put Ireland on a downgrade watch in April and said today that it would be closely watching plans to reduce public spending in the next Budget in December.

"The pronounced weakness in economic activity has been translating into a severe deterioration of Ireland's public finances, and the country is set to emerge from the current economic crisis with a considerably higher debt burden for the foreseeable future," said Dietmar Hornung, a vice president at Moody's.

"A meaningful fiscal adjustment will require an additional structural improvement of Ireland's primary budget balance," added Hornung.

He also said the Government's commitment to inject more than €11 billion into three Irish banks had worsened its own ballooning deficit, while its plans to buy up the banks' defaulting debts and transfer them into a new State-owned "bad bank" could cost tens of billions more. Nonetheless, he said the Government's "strong balance sheet position prior to the crisis" meant the current credit downgrade should be modest.

Typically, credit downgrades raise the cost of borrowing.

The current yield on an Irish 10year bond is 5.38% compared with the bund rate of 3.38%.

SEE: Sovereign bond spreads versus German Bunds in Europe only at historic peaks for Ireland and Austria