RTTNews - Monday, the Standard & Poor's downgraded Ireland's credit rating for the second time this year, citing fears that the government is set to incur a higher-than-expected cost for supporting banks.

The S&P lowered Ireland's rating to AA from AA+. In March, the agency had cut the rating from the top AAA to AA+. An AA rating means the country has strong capacity to meet its financial commitments and differs from the top AAA rating only by a small degree. A rating downgrade implies that the country may have to pay higher interest rates while borrowing funds from international bond markets.

The fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected when we last lowered the rating in March 2009, the S&P said in a statement. Consequently, the agency expects the net general government debt burden also to be significantly higher over the medium term.

Other than Ireland, Japan, UAE and Slovenia hold the AA rating.

Further, the S&P set the rating outlook for Ireland as negative, indicating that it is likely to lower the rating again.

The S&P expects the cost of government's bank rescue measures to rise up to 25 billion euros. In its efforts to rescue the banking system from collapse, the government had created a bad bank called the the National Assets Management Agency to take over toxic assets worth 90 billion euros.

Adding to the bleak picture for Ireland, rating agency Moody's downgraded the ratings of the Anglo Irish Bank last week. Further, the agency placed on review for downgrade, ratings of other Irish banks.

Moody's noted that its review will look at the extent to which Ireland's ability to provide support to its banking system may be impacted by the weakening of the government's own debt capacity (which is under review for possible downgrade) as a result of the ongoing global economic and credit crisis.

In April, Fitch Ratings had downgraded Ireland's ratings and assigned a negative outlook.

Speaking at an event in Dublin last week, Nobel Prize-winning economist Paul Krugman said the Irish economy will take nearly five years to recover. He expects the economy to undergo a slow and prolonged recession. However, Krugman ruled out the possibility of Ireland defaulting on debt.

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