1:21 AM
By Paul Hoskins
DUBLIN | Tue Oct 5, 2010 4:14am EDT
DUBLIN (Reuters) - Moody's warned on Tuesday that it may cut Ireland's credit rating again, pointing to the huge bill for cleaning up its banks announced last week, a weak economic recovery and rising borrowing costs.
Ireland's services sector shrank for the first time in six months in September, a survey showed separately, following data last week which showed its manufacturing sector was back in recession.
The beleaguered Irish government says it could cost up to 50 billion euros ($68.5 bln) to unravel banks' property losses, driving the cost of Dublin's borrowing to three times that of Germany and prompting renewed jitters about debt elsewhere in the euro zone.
The banks bill will quadruple national debt levels to 155 billion euros or over 100,000 euros per household.
"Ireland's ability to preserve government financial strength faces increased uncertainty," Dietmar Hornung, Moody's lead sovereign analyst for Ireland, said in a statement.
"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 that a 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, who have already downgraded Ireland by more.
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.
On the upside, retail sales and exchequer returns data have indicated some stabilization in consumer demand and shaky public finances.
There is little sign, however, that an economic recovery is going to ease pressure on the government to impose further deep spending cuts in the short-term.
Tuesday's Purchasing Managers' Index showed a fall to 48.8 in September from 52.9 in August due to a sharp drop in new orders, particularly in the domestic market. Business sentiment, while still positive, was the least optimistic since April.
Ireland's central bank warned on Monday that the economy will grind to a virtual halt this year and Prime Minister Brian Cowen will unveil a 4-year plan for tackling the EU's worst budget deficit next month.
Moody's said the plan would be key to its review, adding that it was likely to be prove challenging given that growth forecasts used in the government's own debt projections now look overly optimistic.
(Editing by Patrick Graham)
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