IRELAND WILL be the next euro zone country to see its sovereign debt credit rating downgraded to “junk” status, market analysts suggested yesterday.

Moody’s, which slashed its credit rating for Portugal by four notches on Tuesday to Ba2 from Baa1, in April lowered Ireland’s credit rating to Baa3 and left its outlook on negative.

Baa3 (referred to as BBB+ by other ratings agencies) is the lowest investment grade that can be granted to sovereign debt by Moody’s before it is classed as “junk”.

Cathal O’Leary, head of fixed-income sales at NCB Stockbrokers, said the bond markets had at least partially priced in the effect of a further downgrade on Ireland’s credit rating.

Moody’s cited fears that Portugal will struggle to meet its fiscal targets and a belief that it will remain unable to borrow from the bond markets in 2013.

Ireland was making significant progress on its austerity programme and was meeting its targets, Mr O’Leary noted.

“What we’re not doing is re-entering the bond market. If we can’t re-enter the market, then we will be downgraded.”

The move by Moody’s saw the spreads on the debt of peripheral euro zone nations widen. Two-year Irish bond yields increased more than 2 percentage points to 15.30 per cent, while 10-year yields rose 88 basis points to 12.43 per cent. The cost of insuring Irish debt also spiked by 90 basis points to a range of 8.3-8.8 per cent.

“With Exchequer returns for the first half of 2011 broadly on track, Ireland may not be treated in the same manner as Portugal,” said Conall Mac Coille, economist at Davy Research.

But he added that Ireland was still more than likely to be downgraded to “junk”, because Moody’s had already stated that private sector participation in the Greek funding package would lead to downgrades in other peripheral countries.

A downgrade to “junk” status might not have immediate consequences for Ireland given the State is being funded until 2013 under the EU-IMF deal. But if Ireland’s credit rating languishes below investment grade in two years’ time, it will make it virtually impossible to re-enter the bond markets to finance the running of the State.

Meanwhile, Tánaiste and Minister for Foreign Affairs Eamon Gilmore said the Government would engage in talks with the European Central Bank in the autumn on its proposals to impose losses on senior bondholders in Anglo Irish Bank and Irish Nationwide. He said the Government had not quantified the level of contribution it would seek.