The Government is assuming growth assumptions that are too optimistic and Ireland's economy will struggle to grow at all over the next two years, ratings agency S&P said today.
S&P cut Ireland's rating to A from AA- last night and placed the country on negative watch, citing the likelihood the Government would need to fund further capital injections into the troubled banking system.
The Government is assuming real GDP will grow by an average of 2.75% in the years from 2011 to 2014, but S&P said nominal GDP would be 'close to flat' over the next two years.
'That is a different projection from the Government's underlying assumptions which they published today in the national recovery plan which is the four-year medium term fiscal plan,' said Frank Gill, director of S&P's sovereigns rating group EMEA.
Gill said two-thirds of negative credit watch actions have historically resulted in a further downgrade, on average about a month later.
Last night the credit rating agency lowered its rating on Ireland's debt, saying the country is set to borrow more than expected in order to put more money into the banks.
The agency said it was lowering its long-term sovereign credit rating on the Ireland to A from AA-. It also placed Ireland on what it calls 'credit watch', which means a further downgrade is possible.
The move followed Ireland's formal request for financial help from the EU and International Monetary Fund.
'The lower ratings reflect our view that the Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland's troubled banking system,' it said.
S&P said the EU/IMF plan could bring confidence to the banks, but would not reduce levels of Government and private debt.
The agency said it expected little economic growth over the next two years, due to high levels of private debt, tough Budget measures and an uncertain outlook for the European economy.
S&P said the Irish banking system will take several years to downsize, and until that happens it is unlikely to be able to support economic growth.
It also expects little economic growth over the next two years, because of high private debt, tough Budget measures and an uncertain outlook for the European economy.
But it says that Ireland's economic flexibility will continue to prove highly attractive to foreign investors.
S&P's latest report came out close to midnight last night. Under EU law, rating agencies are required to give a minimum 12 hours notice to a country before a ratings action.
Given that timeframe, the report on Ireland was written before news emerged of the new capital ratios necessary for the banks.
Meanwhile, the interest rate demanded by investors to lend money to Ireland climbed today to 9.33%, though Ireland is unlikely to be in the bond markets for two to three years if a deal is agreed with the EU and IMF.
For information on how consumer deposits in banks are protected, see the Financial Regulator's website here