Ireland's government criticized the Moody's downgrade, Dublin-based broadcaster RTE reported, citing a finance ministry spokesman. Ireland has met the targets so far under its bailout program and the downgrade is a “disappointing development,” the spokesman was cited as saying.

'Evolving Approach'
Ireland's National Treasury Management Agency said that “the situation in the euro area is evolving rapidly” and noted that Moody's cited the decision was “primarily driven by their concern about the prospect of private investor participation in future financial support programs in the euro area.”

“In the end, these kind of discussions and the evolving approach just reflect uncertainties that weighs on the creditworthiness of countries that are dependent currently on support,” Dietmar Hornung, a senior credit officer with Moody's in Frankfurt, said in a telephone interview yesterday. “We also decided to keep the negative outlook just to reflect the implementation risk, but also to reflect the shifting tone among EU government toward the conditions under which support to a distressed Euro-area sovereign will be made.”

Irish Bailout
The European Commission said it “regrets” the decision of Moody's to downgrade Ireland and that it “contrasts very much with the recent data, which support a return to GDP growth this year, and the determined implementation of the program by the Irish government, which has taken strong ownership of it.” The Irish program is “fully on track,” the EC said in an e-mailed statement yesterday.

Ireland was forced to seek an 85 billion-euro ($119 billion) rescue in November 2010, as Europe's worst banking crisis overwhelmed the government's austerity efforts.

The yield premium on Irish 10-year debt over German bunds widened to a euro-era record close to 11 percent yesterday. The yield on Ireland's bonds was at 13.35 percent, compared with 11.35 percent a month ago.

Italian and Spanish sovereign bonds are also trading like junk-rated debt amid faltering efforts to contain the debt crisis to the three already-bailed out nations. Yields on Italian 10-year debt have soared 0.7 percentage point so far this month to 5.56 percent, while Spanish 10-year notes climbed above 6 percent yesterday for the first time since November 1997. The euro fell to as low as $1.3837 in New York yesterday, the least since March 11.

Debt to GDP
“This is just another shoe dropping,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “This combined with revelation that the contagion could spread to Italy has the market nervous.”

Moody's cut Ireland's credit rating two levels on April 15 to the lowest investment grade. Ireland's debt will rise to 118 percent of gross domestic product in 2012 from 25 percent at the end of 2007, the European Commission has forecast. Taxpayers have pledged as much 70 billion euros to shore up the country's debt-laden financial system.

Standard & Poor's on April 1 cut Ireland's rating one level to BBB+ with a “stable” outlook. Fitch Ratings affirmed Ireland's BBB+ rating on April 14 and removed it from “rating watch negative.” It said the outlook is negative. Both firms' ratings are three levels above junk.

Portugal's rating was cut four levels to Ba2 July 5, by Moody's.

“Things need to get worse before they get better,” said Steven Lear, deputy chief investment officer at J.P. Morgan Asset Management's Global Fixed Income Group in New York, where he helps oversee $130 billion in assets. “There has to be a lot of pain before the alternative of pain seems palatable.”

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