DUBLIN Moody's warned on Tuesday it may cut Ireland's credit rating again, saying additional austerity measures are needed given a huge bill for cleaning up its banks, a weak economic recovery and rising borrowing costs.
Ireland's deeply unpopular government says it could cost up to 50 billion euros ($68.5 billion) to unravel banks' property losses, driving the cost of Dublin's borrowing to almost three times that of Germany and prompting renewed jitters about debt elsewhere in the euro zone.
While Moody's emphasized there must be additional fiscal rigor to begin repairing the country's battered finances, the ratings agency worried that prolonged austerity could cripple domestic demand with a knock-on impact on government revenues.
In the latest sign of growing distress in the real economy, Ireland's services sector shrank for the first time in six months in September following a sharp drop in domestic orders.
Tuesday's purchasing managers' index survey came on the heels of data last week indicating the manufacturing sector was also back in recession.
"It's important to anchoring fiscal expectations that the government comes up with a credible plan to bring the deficit below 3 percent of GDP by 2014, and in that context additional measures are to be expected," Dietmar Hornung, Moody's lead sovereign analyst for Ireland, told Reuters.
Prime Minister Brian Cowen -- the most unpopular Irish prime minister in modern history -- is due to unveil a 4-year plan for tackling the EU's worst budget deficit next month but a brief economic recovery looks to be petering out, meaning he is likely to have to inflict more cuts on recession-weary taxpayers.
The yield on Ireland's 10-year paper widened by four basis points to 418 bps over German Bunds while the main stock index .ISEQ in Dublin was flat.
Elsewhere, Britain's Tesco (TSCO.L) -- the world's third biggest retailer -- said the global economy was recovering strongly but that Ireland was the only one of its European markets not to show a stronger sales trend in the first half.
A graph in a presentation to analysts indicated sales growth in Ireland slowed over the summer, defying quarterly improvements across Europe, Asia and North America.
The latest downbeat assessments of Ireland's economic prospects come after the country's central bank warned on Monday that economic growth will come to a virtual halt this year, prompting it to join the growing chorus for more spending cuts in order to settle investor nerves.
BETTER THAN SOME
The bank cleanup unveiled this week will quadruple Ireland's national debt to 155 billion euros or over 100,000 euros per household and the budget deficit is set to balloon to 32 percent of economic output this year -- more than 10 times EU limits.
"Recently published data highlight Ireland's weak growth prospects. Fresh uncertainty arises from demand-side weaknesses, particularly the impact of new austerity measures on domestic demand," Moody's said.
On the upside, retail sales and exchequer returns data have indicated some stabilization in consumer demand and shaky public finances while the NTMA, the country's debt management agency, has been praised for organizing issuance in a way that means it does not need to tap markets for fresh funds any time soon.
"We don't have a liquidity issue in Ireland. As you know the NTMA is financed throughout the first half of 2011, so that's on the positive side," Moody's Hornung said in a telephone interview.
"The economic flexibility and competitiveness of Ireland distinguishes the country from some other European or EMU periphery countries."
Moody's said any cut to Ireland's Aa2 rating would most likely be by one notch, bringing it into line with its peers Fitch and Standard & Poor's.
Fitch told Reuters last month that Ireland was still at risk from a downgrade despite a stable outlook on its AA- rating.
Moody's last one-notch cut was on July 19 although it also slashed its ratings on the lower-grade debt of nationalized Anglo Irish Bank last month.
(Editing by Patrick Graham)