Newly appointed IMF chief Christine Lagarde speaking about her plans for leading the fund during her first news briefing at the IMF headquarters yesterday in Washington DC

IRISH government debt is at risk of being cut to 'junk' status by ratings agencies for the first time ever, analysts said last night.

The warning comes after Portugal's government rating was cut to junk on Tuesday, prompting a furious response from European leaders.

Moody's cut Portugal's government debt rating four notches on Tuesday, from Baa1 to Ba2. The Ba2 rating is "sub-investment grade", commonly known as junk. It makes Portugal the second European government bond issuer to lose its investment grade status.

Moody's said it made the cut because it was now more likely that Portugal would follow Greece into a second bailout if it couldn't get back into the markets to borrow in 2013.

If that happens there is also a bigger chance that private sector lenders would be forced to play a role in the new bailout, Moody's said.

Analysts said the same concerns would hit Irish debt ratings.

"If Moody's applies the same rationale to Irish debt then they will come to the same conclusion," said Brian Barry, a market analyst at Evolution Securities in London.

Negative

In April Moody's cut Ireland's credit rating to Baa3, just a single notch above junk, and said it was keeping the Irish on "outlook on negative".

That view was echoed by Cathal O'Leary of NCB Stockbrokers in Dublin.

"If not re-entering the public funding markets has significance for a sovereign's rating, then clearly if our view proves correct, Ireland will suffer an imminent downgrade," he said.

Last night Moody's refused to comment on any plans to revise its Irish rating, but said in an email to Bloomberg News that: "In the different ratings assigned to European periphery countries, we continue to differentiate significantly in terms of the credit profile."

The yield on Irish two-year government bonds hit an all-time high of 14.69pc and the cost of buying insurance to protect against a default also hit a fresh high yesterday.

The yield on Portugal's two-year bonds was even harder hit, rising to 15.88pc from the previous day's 12.335pc. The yield, or cost of borrowing, shot up as bond investors unable to own poor quality bonds were forced to dump their holdings.

Moody's said Portugal's rating was cut partly on fears that the country will not meet its bailout agreement targets. Meanwhile, Ireland is hitting all of its bailout commitments.

European Commission President Jose Manuel Barroso said the ratings cut so soon after Portugal signed up to its bailout deal was "fuelling speculation in financial markets".

German Finance Minister Wolfgang Schaeuble demanded a limit on what he called an "oligopoly" by rating agencies.

Meanwhile, Germany last night signalled for the first time that Europe should not go to extremes to avoid seeing a technical default.

"If a debt downgrade to selective default is not avoidable then the question is can we limit the period of this rating event to a very short period of time?" Germany's Deputy Finance Minister Joerg Asmussen said yesterday.

Mr Asmussen made the comments in a TV interview. He also pushed a German plan for a buyback of Greek government bonds or a swap of old bond for new as a scheme to get private sector involvement in the second Greek bailout.

That plan had been dumped in favour of a French alternative which is currently being discussed by banking sector executives at talks in Paris.

But Mr Asmussen said the French plan for banks to re-loan money to Greece at higher interest rates after it is repaid is too bank friendly and leaves Greece with a bigger repayment burden. (Bloomberg)

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