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updated 12/17/2010 5:11:18 AM ET 2010-12-17T10:11:18

Ratings agency Moody's downgraded Ireland's government bonds by five notches Friday.

Moody's Investors Service dropped the rating to Baa1, the third last investment grade rank, from Aa2.

The ratings agency also warned further downgrades could follow if Dublin was unable to stabilize its debt situation.

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There was little comfort for markets from a European Union summit that agreed on Thursday to create a permanent financial safety net from 2013 but provided no new measures to deal with the immediate crisis.

Ireland's debt levels have quadrupled since late 2007 on the back of a banking sector meltdown, and it needs solid economic growth to ensure it can meet repayments and fiscal targets set down in the 85 billion euros EU/IMF bailout agreed last month.

"While a downgrade had been anticipated, the severity of the downgrade is surprising," Dublin-based Glas Securities said in a note.

While Ireland avoided slipping back into recession in the third quarter — posting gross domestic product growth of 0.5 percent — the modest upturn underlined the huge challenge ahead in tackling its financial crisis.

Just prior to its downgrade of Ireland, Moody's said late on Thursday that it had put Greece's Ba1 rating on review for a possible downgrade, citing uncertainty over the country's ability to cut debt to sustainable levels.

Moody's put Spain's debt on review for a possible downgrade on Wednesday, highlighting concerns over a funding crunch next year, although it said it did not expect Madrid to have to resort to a bailout as Greece and Ireland have.

And Standard & Poor's said this week it may cut Belgium's debt rating if the country's inability to form a government threatened deficit- and debt-reduction goals.

The Associated Press and Reuters contributed to this report.


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