IRELAND's prospects for entering, monetary union were enhanced yesterday after ratings agency Moody's said it is regrading Irish Government debt.

Moody's, which rates the debt of countries and companies, said it is looking at increasing the ratings for Ireland's foreign debt but downgrading the rating of our national debt.

The moves, which the agency said is a result of Ireland's likely participation in monetary union, caused an initial shock on the Irish bond market. However, the market quickly recovered and most analysts expect the move to be positive in the long run.

Dr Michael Somers, chief executive of the National Treasury Management Agency, said they had actually made £25,000 in 20 minutes yesterday after the announcement was made as people sold their bonds back to the Treasury and then attempted to buy them back.

He added that the NTMA has no indication yet how the announcement will affect foreign buying of Irish Government debt. But, he noted, there was a lot of foreign interest in the market which is about one-third foreign-owned.

Ireland's foreign currency debt is currently rated at AA2, the third highest rating while domestic debt attracts a AAA rating - the highest possible.

Mr Steven Hess, a senior analyst; at the ratings company, stressed that monetary union now looks as if it will happen. "We have to look at it,"

he said. "After monetary union the Irish Government will be issuing debt in euros and will obviously be a much smaller issuer in the euro market than it was in the Irish pound market. But it is not a foregone conclusion."

Most countries have the top rating for their domestic debt because they have the ability to print money to pay off any debt. But after joining the single currency Ireland will longer have the ability to print currency, hence the likely downgrading.

One issue which foreign investors are likely to watch is the exact grade which Ireland attracts. Mr Hess said a statement should be issued in 60 days.

Mr Dermot O'Brien, chief economist at NCB Stockbrokers, said it will be important to see if Ireland attracts a higher rating than Belgium for its domestic debt as one issue which Moody's highlighted was the size of the Irish debt.

Mr Hess pointed out that if a country "has a large stock of existing debt then servicing it is not as easy as if you have less debt." However, Belgium has an even higher level of debt as does the Netherlands, both of which are serious contenders for joining monetary union. The different rating each of these countries attracts will be keenly watched.

On the regrading of our foreign currency debt, Mr Hess said the rating they could give to an issuer in the country. "In that way it is not a rating of the Irish Government as such but will reflect the German rating more closely."

Mr Jim O'Leary, chief economist at Davy Stockbrokers, said he expected that any initial negative market sentiment would be reversed early next week.

However, a treasurer with a large institution, said he expected some selling of foreign interest in the Irish bond market. Some portfolios do not have the facility to invest in debt which is not AAA rated, he noted. If this were to happen Irish interest rates would rise for retail borrowers as well as the Government which would find it more difficult to pay down the national debt.