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Moody's downgrades Irish credit rating

Irish bonds now just three notches above "junk status".

The credit rating agency, Moody's, has downgraded Ireland's credit rating by five places to just three notches above "junk status".

Ireland's credit rating has been slashed to "BAA1", which classes Ireland as "a moderate credit risk" and means that "protective elements may be lacking or may be characteristically unreliable".

The new rating is based on concerns over upcoming austerity cuts aimed at reducing the aggregate demand of the Irish economy. The high cost of the €85bn bail out of the Irish banking sector significantly increases the risk of their debt.

The unexpected severity of these cuts is likely to worsen as Moody's maintain negative expectations, with future downgrades a possibility.

The vice-president of Moody's, Dietar Hornung said: "Ireland's sovereign creditworthiness has suffered from the repeated crystallization of bank related contingent liabilities on the government's balance sheet."

"The increased uncertainty regarding the outlook for the Irish economy - an additional determinant of today's rating action - is the result of the continued severe downturn in the financial services and real estate sectors as well as the ongoing contraction in private sector credit."

The agreed €85bn bailout of the Irish banking sector was supposed to aid recovery from the eurozone debt crisis. However, the costs of insuring the Irish, Spanish, Portuguese and Italian debts against default have increased over the last 24 hours.