Moody's has cut the rating on Anglo Irish Bank's unguaranteed senior debt and downgraded its subordinated debt.
The move comes ahead of moves to outline the total cost of bailing out the troubled lender. The Government expects to release a final estimate on the cost of bailing out Anglo Irish Bank later this week.
However, it has reiterated that Ireland will not default on senior debt.
Today, Moody's downgraded the bank's unguaranteed senior debt three notches to Baa3 - one above junk status - and subordinated notes by six notches to Caa1.
“Moody’s expects a continued asset quality deterioration in the loan book of Anglo Irish that will require further government support for the bank’s liabilities," Ross Abercromby, lead analyst for Anglo Irish at Moody's, said in a statement.
"While Moody's considers the likelihood of the government not supporting this debt to be very small, this risk has been reflected in the three-notch downgrade."
The senior unsecured debt ratings are also facing further downgrade, in the absence of explicit government guarantees, Moody's said.
A spokesman for Minister for Finance Brian Lenihan denied that the Government was pursuing a deal with certain senior bondholders that would see them sharing some of the cost of winding down Anglo Irish Bank with taxpayers, as reported in the Sunday Times.
Separately, Anglo said today it won't pay distributions on the €600 million perpetual preferred securities at the next payment date of September 29th.
Irish Government bonds fell this afternoon, with yields rising to 6.578 per cent on the benchmark 10-year security by 2.55pm. The spread between the bonds and the German bund was 430 basis points.
Bonds have been under pressure for some time amid concerns over the the cost of the bank bailout and the sovereign debt. However, Standard and Poor's said it doesn't expect Ireland to default on its debt.
European Central Bank President Jean-Claude Trichet said today the Government has shown it is willing to take the necessary measures to reduce its budget deficit.
"We call all countries to be as alert and as vigilant as possible as regards their own fiscal policies," Mr Trichet said in the European parliament in Brussels today.
Ireland proved that it was able to take up the challenges, he said.
"The challenges are different on a country-to-country basis" and Ireland faces the "additional issue" of dealing with the burden of supporting its banks, he said.
Additional reporting: Reuters, Bloomberg