A Moody's downgrade and growing speculation Greece may eventually restructure its debt took the shine off Ireland's thumbs-up from the EU and the IMF Friday for its efforts to claw its way back from crisis.
Dublin's creditors said the euro zone struggler had passed the first quarterly review of an 85 billion euro ($125 billion) bailout package but warned the new government that challenges remained, including spluttering growth.
This program is a lifeline for Ireland, Ajai Chopra, the IMF's head of mission for Ireland, told a news conference.
This crisis will not be over till we see jobs coming back.
The International Monetary Fund this week cut its 2011 forecast for Irish gross domestic product (GDP) growth to 0.5 percent from 0.9 percent and said unemployment would hit 14.5 percent, from 13.5 percent anticipated previously.
Moody's also cited Ireland's weaker growth prospects when it cut the country's rating by two notches earlier Friday to the verge of junk status and kept its outlook on negative, meaning the next move could also be down.
The ratings cut pushed the euro to a session low against the dollar, falling to $1.4451, down 0.2 percent on the day.
Some investors fear the struggle to fully emerge from recession means Dublin will be unable to meet its debt obligations but Moody's Dietmar Hornung told Reuters that the changes of Ireland having to restructure were very remote.
We don't see that as a plausible scenario, Hornung, vice president and senior credit officer at Moody's, said.
Obviously debt dynamics are not favorable at the moment but we assess that as being sustainable. There are challenges though, that's why we went for a rating action today.
But investors are jumpy.
Germany's suggestion that Ireland's fellow bailout recipient Greece may have to renegotiate its debt has helped push Irish bond yields higher, eroding some of the goodwill Dublin won after it announced a radical overhaul of its banks on March 31.
The eruption of the Greek sovereign crisis last year sent Ireland's troubles, which center on its banks more than its public purse, into overdrive, forcing Dublin into its own European Union-IMF rescue package in November.
While Greece's debt mountain is expected to approach 160 percent of annual output by 2013, Hornung said he expected Ireland's loans to level off at a sustainable 120 percent.
But Ireland's cost of borrowing rose, with the yield premium investors demand to hold five year Irish paper rather than benchmark German bonds 35 basis points wider at 739 bps.
It doesn't take much to move the market, it's so illiquid. Greece has put the restructuring issue back in the spotlight, said one Dublin-based dealer.
MEDIUM TERM GROWTH KEY
A government announcement on March 31 that the banks would be recapitalized by a further 24 billion euros and radically shrunk had been welcomed by investors who for the first time in nearly three years feel Dublin has a handle on its banks.
The EU and the IMF said the reforms were a major step and Finance Minister Michael Noonan said the recapitalization, the bulk of it coming from state coffers, would be completed by the end of July.
Irish banks' reckless lending helped fuel a disastrous property bubble that has left them dependent on emergency funding from the European Central Bank and their customers vastly indebted.
EBS Building Society posted a seven-fold increase in net losses Friday to 590 million euros on the back of loan writedowns and provisioning and said its reliance on ECB funding had doubled after it lost 409 million euros in corporate deposits.
While the EU and the IMF believe Ireland's budget deficit will be 10.5 percent this year -- less optimistic than Dublin's 9.4 percent estimate -- they have not requested additional austerity measures.
The European Commission's country director for Ireland told Reuters that lower growth this year was not a big problem.
We have not revised our medium term forecast and for debt sustainability, that's what matters, Istvan Szekely said.
If views change around medium term growth, then that would be a major change.
But such positive nuggets were lost on investors who focused instead on problems in Athens.
I don't think there is anything they could have said that would have really taken the market's mind off Greece, said Austin Hughes, economist at KBC Bank.
If you look at the appetite for austerity, there is no doubt that Ireland appears to be more willing to take tough measures.
But the simple trade is, 'We don't like countries with big debt with these sort of problems'. Ireland is too close to Greece in that perspective for the markets to make a really informed judgment.
(Additional reporting by Conor Humphries; Editing by John Stonestreet/Ruth Pitchford)