Standard & Poor’s (S&P;) downgraded the long-term rating of the former “Celtic Tiger” by a further notch to AA, from AA+.

The Republic was stripped of its top AAA ranking in March when S&P; concluded that the meltdown in the country’s finances would take far longer to repair than the Government envisaged.

Today S&P; warned: “The rating could be lowered again if asset quality in the Irish banking system deteriorates at a faster pace than we expect … and if, as a result of its suport for the sector or due to an even more pronounced downturn in economic growth, the Government’s fiscal performance weakens further than we currently assume.”

The fresh downgrade was triggered, S&P; said, in part by poor recent figures from Anglo Irish Bank.

In May, in its first results since nationalisation, Anglo reported losses of €4 billion (£3.4 billion) for the six months to March 21, compared with a €667 million profit in the same period last year while provisions for bad loans were €4.1 billion, compared with just €33 million last year.

The losses, S&P; said, were at the upper end of its own expectations and highlighted the “continued fragility of the Irish banking sector”.

S&P; is also sceptical about the power of Ireland’s new National Asset Management Agency (NAMA) to revive the fortunes of its banking sector. The agency is a “bad bank” which will take on the toxic debts of financial institutions.

The ratings agency considers NAMA’s ability to meet its financial objectives is “uncertain because of the risk that cashflows from its assets could fall below its funding costs”.

Overall, S&P; concluded, the cost to the Government of bailiing out the banking sector will be “significantly higher than what we had expected when we last lowered the rating in March … and consequently that the net general government debt burden will also be significantly higher over the medium term”.

Ireland’s economy has been savaged by the global economic downturn as well as a slumping property market, soaring unemployment and tumbling retail sales. In September, Ireland became the first eurozone country to fall into an official recession after it declared two successive quarters of negative economic growth.

Prior to the current downturn, the Irish economy had not experienced a recession since 1983 and enjoyed double-digit growth in the 1990s.

In a bid to salvage the situation the Irish Government has pumped €7 billion into its two top lenders, Allied Irish Bank and Bank of Ireland.

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