Ireland joined Portugal and Greece as the third euro-area nationto have its credit rating reduced to below investment grade asEuropean Union finance ministers struggle to contain the region'ssovereign debt crisis.

Moody's Investors Service cut Ireland to Ba1 from Baa3, citingthe probability that Ireland will need additional officialfinancing and for investors to share in losses before it can returnto the private market to borrow. The outlook remains “negative,”Moody's said in a statement yesterday.

The euro fell to a four-month low against the dollar as Europeanfinance ministers failed to present a solution to the financialcontagion that's threatening to spread to Italy from Greece,Ireland and Portugal. In Spain, Finance Minister Elena Salgado saidthe nation might need to endure even deeper spending cuts in 2012than those currently planned. Ireland, which had a top Aaa ratingjust over two years ago, has suffered after a real-estate boomcollapsed, fueling bank bailouts and a surge in the country'sdebt.

“The downgrade underlines the need for something more radical interms of a European solution,” said Austin Hughes, chief economistat KBC Ireland Plc in Dublin, which publishes a monthly index ofconsumer sentiment. “You really need Europe to come up with asolution rather than pushing it into the future. A solution needsto be found sooner than later.”

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

'Evolving Approach'
Ireland's NationalTreasury Management Agency said that “the situation in the euroarea is evolving rapidly” and noted that Moody's cited the decisionwas “primarily driven by their concern about the prospect ofprivate investor participation in future financial support programsin the euro area.”

“In the end, these kind of discussions and the evolving approachjust reflect uncertainties that weighs on the creditworthiness ofcountries that are dependent currently on support,” DietmarHornung, a senior credit officer with Moody's in Frankfurt, said ina telephone interview yesterday. “We also decided to keep thenegative outlook just to reflect the implementation risk, but alsoto reflect the shifting tone among EU government toward theconditions under which support to a distressed Euro-area sovereignwill be made.”

Irish Bailout
The European Commission saidit “regrets” the decision of Moody's to downgrade Ireland and thatit “contrasts very much with the recent data, which support areturn to GDP growth this year, and the determined implementationof the program by the Irish government, which has taken strongownership of it.” The Irish program is “fully on track,” the ECsaid 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 crisisoverwhelmed the government's austerity efforts.

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

Italian and Spanish sovereign bonds are also trading likejunk-rated debt amid faltering efforts to contain the debt crisisto the three already-bailed out nations. Yields on Italian 10-yeardebt have soared 0.7 percentage point so far this month to 5.56percent, while Spanish 10-year notes climbed above 6 percentyesterday for the first time since November 1997. The euro fell toas low as $1.3837 in New York yesterday, the least since March11.

Debt to GDP
“This is just another shoedropping,” said Larry Milstein, managing director in New York ofgovernment and agency debt trading at RW Pressprich & Co., afixed-income broker and dealer for institutional investors. “Thiscombined with revelation that the contagion could spread to Italyhas the market nervous.”

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

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

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

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

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