THE GOVERNMENT’S €3.5 billion bond swap this week was “an encouraging sign” but the timing and cost of the State returning to the markets remains uncertain, ratings agency Fitch has said.

Ireland faced a new risk of a downgrade arising from a possible referendum that may need to be held on the new EU fiscal treaty.

The agency said the probability of Ireland rejecting another EU treaty was not negligible.

“The uncertainty that would be created by another such No vote would put further pressure on the rating,” said Fitch.

Spain, Italy and three other euro countries were downgraded by Fitch yesterday. Ireland’s BBB+ rating – three notches above junk – was affirmed but it was left on negative watch, pointing to a possible downgrade.

Ireland faced risks from the economic downturn in its major European trading partners, Fitch said.

Heightened tensions in the euro-zone banking sector could also be damaging. “The timing and interest rate level of the sovereign’s return to market financing remains uncertain, although the recent bond switch aiming at smoothing the maturities between 2014 and 2015 is an encouraging sign,” said Fitch.

Investors in Irish Government debt, mostly Irish banks, agreed on Wednesday to push out the repayment of €3.5 billion of a €11.8 billion bond falling due on January 2014 for 13 more months.

The investors were paid a higher interest rate on a new three-year bond and can use these bonds as collateral to borrow discounted three-year loans from the European Central Bank.

The banks can then book as profit the difference between the 5.15 per cent rate paid on the new debt and the 1 per cent cost they pay the ECB for three-year loans.

Ireland could be downgraded if there was contagion from “further intensification of the eurozone crisis”, Fitch said. A “material slippage” in the recovery, due to “looser fiscal policy or a significant deterioration of the growth trajectory”, could lead to a downgrade.

The outlook could stabilise if the EU-IMF bailout programme is followed, the country returns to sustainable growth and the eurozone crisis abates, Fitch said.

Ireland and five other countries were placed on negative watch last month over the failure to find a solution to the growing euro crisis.

Fitch said the flexibility of the Irish economy to cut wages and prices allowed it exploit strong external demand in early 2011. The agency said Irish banks faced rising bad loans and further adjustment as property prices have yet to reach a bottom and mortgage foreclosures remained low.