Ireland’s debt rating has been downgraded to just above junk status amid warnings that austerity plans may not be enough to repair its battered economy. Moody’s has cut the rating by two notches, to Baa3 - just one move away from a junk rating and to the same level as Iceland and Tunisia.

The news came just hours before an announcement by the Irish Government of a revised agreement with international lenders on the terms of its €67.5bn bail-out. The European Commission, European Central Bank and International Monetary Fund are due to lower interest terms on Ireland’s loan in return for tough austerity measures.

Moody’s said on delivering its ratings blow that Ireland’s economy could decline further if recovery efforts are hampered by harsh deficit cutting or if spending cuts fell short. It cautioned that more government belt-tightening may be needed to get the economy back on track, on top of the €15bn spending cuts already earmarked for the next five years.