In its annual report on Ireland, Moody's has said that the country's current credit rating reflects "the significant deterioration in the Government's financial strength ".

The rating agency said this follows the ''crystallisation of contingent liabilities'' in the banking sector and a severe economic contraction.

Moody's has rated Ireland at Ba1, which is a "medium grade" rating.

This is because the outlook for the economy has speculative elements and poses a moderate credit risk.

Moody's said that on the basis of Ireland's fiscal consolidation plan and the country's "lacklustre" economic outlook, it expects the country's debt to GDP ratio to peak at around 120% over the next two years.

Ireland's modest economic growth prospects are driven by the ongoing fiscal consolidation process and the limited availability of private-sector credit, the Moody's report says.

Today's report is not a credit rating action, but an annual update to the markets. The rating agency assessed Ireland's economic strength, institutional strength, government financial strength and susceptibility to risk.

It said that Ireland has a relatively predictable policy framework, a commitment to fiscal consolidation and structural reforms, and success in achieving all of its objectives under the fiscal adjustment required by the EU/IMF programme. It said this accounted for an assessment of high institutional strength.

Moody's also highlighted the economy's competitiveness, a business-friendly tax environment and the labour market's flexibility as reflected by the considerable wage adjustment that occurred during the crisis.

But Moody's warned that while there is potential for strength in the domestic economy, external factors are a threat, including weakness in the economies of Ireland's trading partners. The rating agency said this means it is uncertain how Ireland grow and become more competitive.