July 2 (Bloomberg) -- Ireland had its top credit rating lowered one step by Moody’s Investors Service, which cited the country’s rising debt burden and a “sudden and brutal economic and financial adjustment.”

The rating was cut to Aa1 from Aaa, Moody’s said in a statement today, putting it on the same level as Belgium. The rating company, which awarded Ireland the top grade in 1998, assigned it a “negative” outlook, signaling it’s more likely to reduce the assessment again than raise it or leave it alone.

Ireland’s economy will shrink by about 8 percent this year, faster than any other in the euro region, while its deficit will soar to 10.8 percent of gross domestic product, more than three times the European Union limit, according to the government. Finance Minister Brian Lenihan said in April the government would take on 90 billion euros ($124 billion) of property loans from the country’s lenders to stave off their collapse.

“The rationale behind the downgrade stems from three key drivers of our credit analysis regarding debt: affordability, financeability and reversibility, which for Ireland are weakened as compared to Aaa peers,” Dietmar Hornung, a senior analyst at Moody’s in Frankfurt, said today in the statement.

Ireland’s benchmark 10-year bond rose, driving the yield on the security nine basis points lower to 5.61 percent as of 17:42 p.m. in London. The difference in yield, or spread, between the bond and the equivalent German security narrowed 1 basis point to 230 basis points.

‘Galvanize’

“It will probably galvanize the department of finance and the government in the need to ensure they do something to turn things round,” Austin Hughes, chief economist with KBC Bank Ireland in Dublin, said in a phone interview.

Ireland’s budget deficit more than doubled in the first half of the year to 14.7 billion euros, the Finance Ministry said today.

Credit-default swaps on Irish government debt rose 9 basis points to 194 basis points, according to CMA DataVision prices. Credit-default swaps, conceived to protect investors from default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals deterioration in the perception of credit quality.

The creation of the National Asset Management Agency, which is being set up to manage souring property loans, will have a “limited” impact on Ireland’s net debt levels, Moody’s said.

“We have set out a budgetary strategy to deal with the challenges we now face,” the finance ministry said in an e- mailed statement after the Moody’s announcement. Tax and expenditure are now “generally in line” with the government’s forecasts, it said.

Standard & Poor’s and Fitch Ratings downgraded Ireland’s debt earlier this year.

To contact the reporter on this story: Fergal O’Brien in Dublin at fobrien@bloomberg.net.

Last Updated: July 2, 2009 12:46 EDT