Page last updated at 13:02 GMT, Wednesday, 8 April 2009 14:02 UK

All Irish banks have ratings cut

Bank branch
Allied Irish shares dropped to 84 euro cents following the downgrade

Ireland has had the debt ratings on all of its banks cut by Moody's, a day after revealing its emergency budget.

Finance Minister Brian Lenihan unveiled on Tuesday his decision to buy toxic debt from banks at a discount in exchange for government debt.

But the plan did not placate the ratings agency, who said it downgraded the 12 banks because the worsening economy would hurt bank profits anyway.

However, the European Commission said the budget was "decisive".

'Absolute urgency'

"The commission's preliminary assessment is that decisive, broad-based action has been taken in the supplementary budget, in very difficult economic circumstances," a commission spokesman said.

Before Brussels gave its backing, shares in Allied Irish Bank and Bank of Ireland both fell by about a third.

However, they later rallied. In early afternoon trade, Allied Irish was 20% lower and Bank of Ireland down 5%.

The Irish government said the Moody's downgrade showed the harsh reality that the Republic must do more to reassure international investors it was getting debt under control.

Foreign Minister Micheal Martin said the downgrade "underlines the absolute urgency and necessity to deal with this in a comprehensive and clear way".

He added: "The banks have been in denial that they have non-performing assets on their books."

Bond yields

The downgrades mean Moody's thinks the banks are in a weaker financial position and can make it more expensive for them to borrow in the future.

Losses from the falling housing market and rising bad loans on their balance sheets will hurt the Irish banks, the agency added.

"We believe that these losses are likely to significantly weaken the capital positions of most Irish banks and building societies over the next two years," Moody's said.

Mr Lenihan's emergency budget on Tuesday included a large rise in taxes and a cut in spending, to deal with the Irish Republic's budget deficit.

Yields on the benchmark Irish debt have risen by more than one percentage point since the start of the year as investors have worried about the state of the Republic's public finances.

The rise means that investors want more compensation to hold the debt because they think there is more chance that the Irish Republic will default.

The increase also means its more expensive for the government to borrow and expand the public debt.

The yield on the Irish 10-year bond was 5.34%, up from 4.27% at the start of the year.

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