By Larry Elliott

Standard & Poor’s says republic faces threat of credit downgrade as fresh debt fears drive down euro on foreign exchanges

Ireland has two years to convince financial markets that it is different from Greece or it will face the prospect of a fresh ratings downgrade, it emerged on Wednesday as the euro was dragged down on the foreign exchanges by fresh sovereign debt fears.

The ratings agency Standard & Poor’s said it was not yet ready to put Ireland in the same category as Greece – where one leading official warned on Wednesday that the alternative to even deeper spending cuts would result in the country leaving the single currency and returning to the drachma.

But Trevor Cullinan, S&P’s lead analyst for Ireland, said there would be serious consequences if the government in Dublin could not get access to debt markets by 2013.

The warning came as the Paris-based Organisation for Economic Co-operation and Development said in its half-yearly health check on the west’s richest economies that the debt position of Greece, Ireland and Portugal would be unsustainable should the current high levels of market interest rates persist. Irish 10-year bond yields have more than doubled over the past year from 5% to 11%.

On the foreign exchanges, the euro fell to a record low against the Swiss franc and to its weakest against the pound in two months after Greece’s EU commissioner Maria Damanaki was quoted as saying by the semi-official Athens News Agency: “I am forced to speak openly. Either we agree with our lenders on a programme of tough sacrifices … or we return to the drachma.”

It was the first time a prominent Greek official has publicly raised the prospect of reintroducing the currency that Greece abandoned when it joined the eurozone in 2001.

Speculation has gripped financial markets in recent weeks that even fresh financial assistance from the European Union and the International Monetary Fund will not solve Greece’s mounting debt crisis.

The OECD said yesterday that even if Greece, Ireland and Portugal met their tough deficit-reduction targets, “their fiscal positions would not be sustainable if market interest rates were to remain for long at their current rate”.

It added that in the absence of a return to market confidence, the “unsustainable condition” could be tackled in one of three ways – by further bailouts, a rescheduling of debt or by even more drastic restructuring of their finances.

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