The New York-based agency said it was immediately lowering Ireland's rating from the top level, AAA, to the second-highest level of AA+ - a move likely to drive up the price that Ireland must pay bond markets to fund its borrowings.

Ireland had enjoyed the S&P's top-tier grade since 2001 when its Celtic Tiger boom was still in full roar and taxes were pouring in. Now the Irish have fallen back into the ranks of the European Union's more credit-risky nations. S&P lowered the ratings of Greece, Portugal and Spain in January - and none of them faces anything like the debt difficulties now facing Ireland.

The government of Prime Minister Brian Cowen plans to unveil an emergency budget April 7 that seeks to prune at least euro6 billion (US$8 billion) from the projected 2009 deficit.

Cowen is trying to keep the government red ink within 9.5 per cent of gross domestic product - still more than triple the three per cent limit that the European Union sets for members of the euro currency zone - but S&P said this year's deficit spending would likely exceed 10 per cent of GDP.

"The downgrade reflects our view that the deterioration of Ireland's public finances will likely require a number of years of sustained effort to repair, on a scale greater than factored into the government's current plans," S&P credit analyst David Beers said in a statement.

The government says its tax take this year could fall below euro35 billion while its spending commitments exceed euro55 billion. The sudden plunge into the red reflects the fact that Ireland's tax system had become unusually dependent on capital gains taxes and property deals, which soared during the boom but have disappeared in the recession.

Rising tide

The government also is about to buy 25 per cent stakes in Ireland's two biggest banks, Allied Irish and Bank of Ireland, at a cost to the taxpayer of euro7 billion. Some analysts think that figure won't be sufficient to buttress both institutions against a rising tide of defaulting loans to property developers. Most of the euro7 billion is coming from the government's reserve fund for state-backed pensions.

Beers said S&P expected Ireland's economy to perform below the euro-zone average for the next five years, and for its total debts to peak above 70 percent of GDP by 2013. He said he didn't expect Ireland to take a more aggressive, long-term debt reduction plan until that year because Ireland's next general election is expected in 2012.

But he said S&P might raise its outlook on Ireland from negative to stable if Cowen's 10-month-old government "embraces a fiscal strategy that contains the rise in the public debt burden in line with Ireland's modest economic growth prospects."

The government offered no immediate reaction. Richard Bruton, finance spokesman for the opposition Fine Gael party, called the S&P downgrade "bad news for Ireland at a very bad time."

Bruton said it "will make it even harder for the economy to recover," because the international bond market will charge Ireland higher rates of interest to fund its borrowing needs. "Borrowing just became more expensive, and the government will have to dig even deeper to balance the books next week."

- AP