Irish bank shares have recovered somewhat from this morning's steep falls following a downgrade by credit rating agency Moody's.

After falling as much as 38% earlier, shares in AIB are down 8.5% to stand at €1.17 this afternoon, while Bank of Ireland is down almost 8% at 89c.

Irish Life & Permanent managed to reverse its earlier losses to stand 10% higher at €1.82.

Moody's cut its ratings on 12 banks operating in Ireland, despite the Government's plan to create an asset management agency to buy up risky bank loans.

Fitch Ratings has cut Ireland's AAA credit rating to AA+ according to John Corrigan, director of the national pension fund.

Mr Corrigan told reporters this afternoon: ‘We had AAA. Today they brought their rating to AA+’.

But a downgrade from Fitch following a similar move by Standard & Poor's will raise the cost of borrowing additional funds overseas.

Fitch also said it holds a negative outlook for Ireland, suggesting more cuts may come.

‘The outlook for Ireland's public finances and fiscal risks is no longer consistent with an 'AAA' rating,’ Fitch said in a statement.

The yield on Irish 10-year bonds rose to 5.35% compared with 5.31% in early afternoon trade.

In his Budget speech yesterday, Finance Minister Brian Lenihan said a new National Asset Management Agency would purchase soured assets at a significant discount to their €80-90bn book value by issuing Government bonds to banks.

Moody's said it had been incorporating expected losses on bank loan portfolios for some time.

However, it has considerably increased those expectations because of the continuing deterioration in the outlook for commercial property prices and the likelihood of more corporate defaults as the economy enters a deep recession.

Moody's is also concerned at the current erosion in residential loan performance, including the buy-to-let market, which makes up around 25% of the total market.

This has pushed the rating from a C rating to a D rating.

'We believe that these losses are likely to significantly weaken the capital positions of most Irish banks and building societies over the next two years', said Ross Abercromby of Moody's.

The 12 banks named are AIB, Bank of Ireland, ICS Building Society, EBS Building Society, Irish Life and Permanent, Ulster Bank Ltd, Ulster Bank Ireland, First Active, Bank of Scotland (Ireland), KBC Bank, Irish Nationwide Building Society and Zurich Bank.

Moody's said it expects AIB and Bank of Ireland to be the main beneficiaries of this new support scheme.

The Taoiseach had told the Dáil that the National Asset Management Agency will purchase the toxic assets held by the banks after it has evaluated them.

Brian Cowen said the amount paid for these assets will be less than their paper value, because the evaluation will take account of the decrease in property prices.

He said the paper value of the assets at the moment stands at about €80 to €90bn.

The Labour leader Eamon Gilmore said this new asset agency was going to buy from developers, the half-built apartment blocks and building sites, that they could no longer afford to finish.

It has emerged that the agency is to target all of the land and property development loans of the six banks of covered by the State guarantee.

It will purchase healthy borrowings as well as bad debts in some cases.

This means the total potential book-value of the loans that will be purchased will be between €80bn and €90bn.

However the amount paid will far less than this figure.

Finance Minister Brian Lenihan said that ‘this is about ensuring people can access credit’.

He said it was also about giving assurances to depositors in Irish banks.

The new agency will have a commercial mandate.

‘It is the intention to secure all of the loans. Some performing, some not performing, but it is important they are all taken in’, Minister Lenihan said.