Ireland's stricken banking sector in doldrums

Moody's has lowered its credit ratings on Ireland by two notches to Baa3 from Baa1. Moody's on Friday cut its credit ratings on Ireland by two notches to just above junk status, citing an "expected decline" in government finances that is set to hamper the indebted nation's recovery .
"Moody's Investors Service has today downgraded Ireland's foreign- and local-currency government bond ratings by two notches to Baa3 from Baa1," a statement said.
It added that the outlook on the ratings "remains negative" - meaning further downgrades are possible.
Downgrades by ratings agencies like Moody's can ramp up borrowing costs on markets for those hit, making their funding problems more difficult to manage, while eurozone member Ireland is already struggling to service its huge debt.
The new ratings for Ireland - which recently needed an international bailout worth 85 billion euros ($123 billion) - is just one notch above BB, or junk status.
Government bonds afforded such a rating are said to carry high risk and thus need to offer sizeable yields to investors.
Explaining Friday's downgrades, Moody's pointed to "further weakening of the Irish government's financial strength, given the subdued economic activity and the crystallization of additional bank contingent liabilities."
It added: "From a sovereign perspective, the recent completion of the Irish bank stress test has led to further bank contingent liabilities weighing on the government's balance sheet."
Ireland's central bank last month ordered a drastic overhaul of the nation's stricken banking sector as the cost of bailing out its lenders was set to top 70 billion euros.
On Thursday, the central bank forecast that the country would grow by only 0.9 percent in 2011, down from an earlier estimate of 1.0 percent.
Formerly known as the Celtic Tiger for roaring growth spanning almost a decade from the late-1990s, the Irish economy has contracted for the last three years.
Ireland's 85-billion-euro debt rescue, agreed in November with the European Union and the International Monetary Fund, is partly required to bolster its ailing banking sector, which was crippled by the financial crisis.
On Friday, Moody's warned that the government's financial strength may also suffer from a series of interest rate hikes by the European Central Bank.
"Specifically, Ireland's finances may be impacted by the resulting increase in its own funding costs, as well as by the adverse impact of rising interest rates on Irish consumers, given that more than 70 percent of Irish mortgages are variable-rate mortgages," it added.
The European Central Bank last week hiked interest rates from a record low level - by a quarter point to 1.25 percent - to tame rising prices.
Moody's on Friday added that its Ireland downgrades were partly based on uncertainties surrounding how and under what circumstances the European Union might provide additional liquidity support.
It also said that should Ireland's government fail to meet its fiscal consolidation goals, a further rating downgrade would likely follow. "A further deterioration in the country's economic outlook would also exert downward pressure on the rating."
Earlier this year, Brian Cowen's centrist Fianna Fail administration was ousted from power as Irish voters vented their anger over the bailout.
Enda Kenny became Ireland's prime minister after a dramatic general election, and now heads a coalition government of his centre-right Fine Gael party and centre-left Labour.